A skeptical market is finally starting to see International Business Machines (NYSE: IBM) as a leading name in the artificial intelligence (AI) market. As a result, IBM’s stock has gained a market-beating 37% in 2024 — or 44% if you look at total returns with reinvested dividends.

Is Big Blue still a buy after this swift rise, or is the growth engine running out of rocket fuel? Let’s see how the company and stock are positioned just before 2025.

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Don’t judge a Big Blue stock by its cover

At first glance, IBM’s recent results may not look too impressive.

Sales rose just 2% year over year in the recent third-quarter report. Foreign exchange effects explained the entire revenue increase. Bottom-line earnings per share (EPS) came in 5% higher, partly thanks to a slightly lower tax rate. Am I boring you to sleep yet? That’s a safe and stable report, broadly aligned with analyst expectations and hardly anything to get excited about.

But when you dig deeper, you’ll see that IBM’s flattish results actually are impressive. The beefy infrastructure segment showed a 7% revenue dip, led by a 19% downturn in the very cyclical IBM Z mainframe business. This division rises and falls with mainframe product cycles, and the next refresh of IBM Z systems is due in 2025. That release should see more AI features powered by IBM’s custom AI chips.

Balancing out that cyclical headwind, IBM’s software and services pulled their weight. Automation revenues rose 13%, the Red Hat hybrid cloud business came in 14% higher, and AI revenues ticked 5% higher.

That’s another disappointing figure, right? AI is supposed to be a leading growth driver, not a modest single-digit revenue booster. So, it’s nice to see other businesses make up for the predictable mainframe slowdown. But why is the AI growth so limited?

IBM’s long game in AI contracts

The thing is, IBM doesn’t make quick sales. Instead, it sets up long-term subscription and technical support contracts. The setup phase can be quite slow, especially regarding complicated ideas like setting up generative AI systems. Many prospective clients go through several rounds of technical testing, management approval, and budget processes before signing on the dotted line.

But when they do, IBM will have a lucrative customer for the long haul.

In the spring of 2023, the company launched a generative AI platform called watsonx. One year later, watsonx had amassed more than $2 billion of firm multiyear contracts.

One quarter later, the watsonx order book had grown by another $1 billion. That’s a 50% order increase in three months, also known as a tipping point. Big Blue will convert these paper contracts into cash sales over time while also signing more AI deals.

Ready to rock after a decade-long drumroll

This dynamic has been fairly obvious since watsonx was introduced. This is how IBM works, and you’re watching the company finally take advantage of a strategy shift nearly a decade in the making.

And next year’s AI-boosted System Z mainframes will represent the bullish half of a multiyear business cycle. Adding that business driver to the AI contract activity should result in soaring sales and generous cash flows.

“Our portfolio is well positioned to deliver an upward inflection in growth in 2025,” IBM CEO Arvind Krishna said in the third-quarter earnings call. That’s a modest way of saying IBM’s results should impress Wall Street next year.

IBM is a bargain in the booming AI market

The recent price gains have also increased the stock’s valuation ratios. That’s just how math works, I’m afraid. But IBM shares still look affordable in comparison to other AI giants, especially when you focus on the all-important cash profits. Whether you measure each stock by price to sales or price to free cash flow, Big Blue is a bargain-bin buy next to Nvidia or Microsoft:

AI Stock	Price to Free Cash Flow (TTM)	Price to Sales (TTM)	Market Cap
IBM	16.5	3.3	$207 billion
Nvidia	58.3	29.1	$3.30 trillion
Microsoft	44.7	12.8	$3.2 trillion

Data sourced from Finviz.com on Dec. 20, 2024. TTM = trailing 12 months.

I’m excited about the AI boom and don’t mind taking a slow approach to investing in that game-changing revolution. Therefore, I highly recommend grabbing some IBM shares while they are cheap. Nvidia and Microsoft can wait.

Next year’s business growth should leave 2024’s modest gains far behind, especially if you keep an eye on IBM’s future-proofing watsonx contracts.

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Anders Bylund has positions in International Business Machines and Nvidia. The Motley Fool has positions in and recommends Microsoft and Nvidia. The Motley Fool recommends International Business Machines and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.