This Underrated AI Stock Is Profitable Yet Overlooked by Retail Investors

Key Points

• IBM's unique combination of consulting, software, and hardware is winning billions in artificial intelligence (AI)-related business.

• Demand for the company's AI solutions should remain strong, regardless of how the AI industry evolves.

• With growing revenue and free cash flow, IBM is a attractive AI stock.

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The artificial intelligence (AI) industry is evolving fast, and headlines are dominated by companies that churn out top-tier AI models like Open AI and Anthropic, AI infrastructure providers like Microsoft and CoreWeave, and AI chip companies like Nvidia and AMD. Plenty of other companies are using AI to great effect, but they don't get the same level of attention.

International Business Machines (NYSE: IBM) is killing it in AI, and it's a real shame many investors haven't caught on. IBM's AI strategy is focused on providing solutions to its enterprise clients. The company isn't plowing mountains of capital into AI data centers, and it isn't splurging on training industry-leading models. Instead, through a mix of consulting services, software, and hardware, IBM is emerging as a leader in enterprise AI.

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$7.5 billion and counting

Since IBM kicked off its generative AI strategy, the company has booked more than $7.5 billion worth of business. Around 80% of this total comes from the consulting business, with the rest coming from software. Playing a supporting role is hardware, namely IBM's decades-old mainframe business.

IBM's consulting-forward strategy works because enterprise clients need more than software. IBM's watsonx platform provides the software tools necessary for clients to develop, fine-tune, deploy, and govern AI agents and applications, but implementation services and other offerings from the consulting business are equally important. A client who uses AWS and Azure for cloud computing may want to deploy watsonx on those platforms, for example, requiring a complex solution that IBM can provide.

IBM does train its own AI models, but the focus is on speed, safety, and cost. IBM's Granite family of models are designed to be fine-tunable for specific tasks. They're open source, perform well in safety benchmarks, and are cost-effective for businesses. In terms of performance, Granite beats competing AI models of similar complexity in a variety of benchmarks.

IBM's mainframe business shouldn't be ignored. Major industries including financial services still depend heavily on IBM's mainframe systems, and the latest z17 model brings some serious AI firepower. The z17 is designed for more than 250 distinct AI use cases, ranging from loan risk mitigation to medical image analysis, and it can handle 450 billion AI inferencing operations per day with response times of one millisecond. For enterprises needing real-time AI inferencing and rock-solid reliability, IBM's mainframes continue to be the best option.

Importantly, IBM's AI strategy doesn't depend on AI technology making exponential gains in capabilities, or on ever-increasing AI infrastructure investments. Because IBM is focusing on delivering AI solutions that help companies reduce costs or boost efficiency, demand should hold up even if the AI frenzy cools off. As it stands today, AI is incredibly useful for businesses, and IBM is playing a critical role in enabling enterprises to tap into the technology.

Surging free cash flow

After a decade of uninspiring results and inconsistent revenue growth, IBM has settled into a groove. The company has shed slow-growing businesses and bet on its hybrid cloud computing and AI platforms. Revenue is not only growing again but accelerating, and profits are improving.

Image source: Getty Images.

For 2025, IBM expects revenue at constant currency to grow by at least 5%. That may not seem all that quick, but IBM is still a sprawling company with numerous product and service offerings, and it's currently facing a slowdown in demand for discretionary tech projects. Some parts of IBM are growing slowly, and some, like AI, are growing much faster.

IBM also expects to generate more than $13.5 billion in free cash flow this year, up from $12.7 billion in 2024. That's solid growth, particularly given the unpredictable economic developments so far in 2025. Strong growth for IBM's high-margin software business, its largest segment, is helping the cause. Software revenue grew by 8% in the second quarter and managed a segment operating profit margin of 31.1%.

With solid profits, a return to reliable revenue growth, and an AI strategy that's working well with its enterprise client base, IBM is an AI stock that all investors should seriously consider.

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Timothy Green has positions in International Business Machines. The Motley Fool has positions in and recommends Advanced Micro Devices, International Business Machines, Microsoft, and Nvidia. The Motley Fool 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.