Is IBM Stock a Buy Now?

Many tech companies are touting artificial intelligence (AI) these days, but few even existed when International Business Machines (NYSE: IBM) began working on AI in the 1950s.

Today, IBM is focused primarily on the twin technologies of AI and cloud computing . Both of these areas are massive markets worth $184 billion and $676 billion, respectively, in 2024.

With the AI market experiencing explosive growth and Big Blue's decades of experience in the field, does investing in the venerable tech giant make sense now? To arrive at an answer, here's a look at IBM and whether it's a worthwhile long-term investment.

How IBM is faring

As a mature organization with over a century of history, IBM isn't considered a high-growth tech company . However, since CEO Arvind Krishna took over the top spot in 2020 and centered the company around AI and cloud, Big Blue has seen a steady rise in revenue.

Data by YCharts .

IBM is continuing this trend in 2024. It delivered a solid performance in the second quarter, demonstrating Big Blue's success at capturing its share of the competitive AI and cloud computing markets.

The software division, where IBM's AI and cloud sales are grouped, saw second-quarter revenue increase 7% year over year to $6.7 billion. This helped its Q2 revenue reach $15.8 billion, up from 15.5 billion in 2023. That's just the start of its excellent Q2 financials.

The tech veteran's gross margin rose to 56.8% in Q2, up from 54.9% in 2023. Its Q2 net income reached $1.8 billion compared to $1.6 billion last year, helping its diluted earnings per share (EPS) to increase to $1.96 from 2023's $1.72.

The company's Q2 free cash flow (FCF) grew to $2.6 billion from $2.1 billion in 2023. In fact, IBM's first-half FCF results were so good, the company expects 2024 free cash flow to exceed $12 billion. Big Blue delivered FCF of $11.2 billion last year.

FCF is a key metric since it shows the incoming cash profits becoming available to invest in the business, reduce debt, and pay dividends. IBM's rising FCF indicates its dividend is secure, which is one of the main reasons for investing in the firm. Currently, its dividend offers a hefty yield of 3.5%.

Not only that, but the FCF growth suggests IBM is well-positioned to continue its unbroken 29-year streak of annual dividend increases. The company provides one of the most reliable dividends around, having made consecutive quarterly payments since 1916.

A crack in IBM's armor?

Its excellent Q2 results and high-yield dividend offer compelling reasons to invest in IBM. However, not all areas of the company's operations flourished in the second quarter.

Sales in its consulting division, which comprised $5.2 billion of its $15.8 billion in Q2 revenue, were down 1% year over year. Dr. Krishna explained the drop, stating, "factors such as interest rates and inflation-impacted timing of decision-making and discretionary spend in consulting."

IBM's consulting segment is a key revenue driver since it and the software division collectively comprised over 75% of Big Blue's Q2 sales. Its thousands of consultants help customers implement AI into their organizations.

Big Blue is also leveraging its army of consultants to sell cybersecurity products for Palo Alto Networks . The partnership was announced in May, so it will take time to see if this deal can help IBM's consulting revenue grow.

To buy or not to buy IBM stock

Along with partnerships, IBM is also working on future technologies, such as quantum computing, to fuel revenue growth. Quantum computers use subatomic particles to perform complex calculations that promise to solve challenges beyond the abilities of today's supercomputers.

Quantum computers are so powerful, they can easily crack most cybersecurity protections in place today. This kind of power can evolve existing AI technology to new heights.

Quantum computing is in its formative years, perhaps akin to what AI was like when IBM worked on the tech in the 1950s. So, it may take a while to see the fruits of IBM's quantum computing investments. In the interim, investors can benefit from Big Blue's robust dividend.

IBM's investments in AI, cloud computing, and now quantum computing, combined with its revenue growth, rising FCF, and dependable dividend, make it an attractive long-term investment, particularly for investors looking for passive income .

Despite the weakness in its consulting division, IBM's Q2 performance was strong enough to drive IBM's share price upward, and now it's not far from the 52-week high of $199.18 reached in March.

As a result, it's ideal to wait for the share price to dip before buying. So, for now, IBM is worth putting on your watch list.

Robert Izquierdo has positions in International Business Machines and Palo Alto Networks. The Motley Fool has positions in and recommends Palo Alto Networks. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy .