IBM is undervalued relative to long-term growth potential; sovereign AI and quantum initiatives support a contrarian bull thesis.

Yeah, absolutely. Well, and I wanted to hit one final stock today. This is more of a legacy business that I find to be an interesting way to play the sovereign AI boom. And I wanted to talk about IBM, right?

I mean, this is not a new business. This is sort of a household name. And it's interesting.

So they there was a real quantum computing milestone that was announced back in July. So IBM and quantum startup Algorithmic announced that they had demonstrated what they're calling quantum advantage.

And that was a quantum computer solving certain computational problems more efficiently than today's leading classical computers. And they also independently verified the results because obviously one of the most persistent criticisms of prior quantum advantage claims across the industry has been the difficulty of confirming whether those outputs are correct.

You know there was an interview with the CEO Arvin Krishna on CNBC. He said that he expects quantum computing to have a measurable impact on IBM's earnings by 2028 or 2029. Um they said that IBM is very convinced that quantum represents a trillion dollars of value by the late 2030s.

So that's one interesting piece of the puzzle to talk about. Now looking at the business as a whole, I mean there's a few different reasons to like this stock. I I have to also mention the fact that it's a long-standing dividend payer.

IBM has paid a dividend in some form since 1916, so over a century. They've raised it for 31 consecutive years. Um, and they also are, you know, habitually free cash flow positive.

They've really steadied their dividend payout ratio.

You know, this is a company that has been sort of looking to pivot into the next era of its growth story. And as we're seeing that, you know, revenue growth is still pretty modest and uh tends to be in, you know, the the low or single digits, but their Red Hat specifically posted accelerating double-digit growth.

Their distributed infrastructure line delivered record growth of 37% year-over-year recently.

So, they've spent the last several years repositioning around hybrid cloud, which is the Red Hat business, enterprise AI, and increasingly sovereignty and trust for regulated industries and governments.

That's where we're seeing the sovereign AI angle.

You know, they had a conference back in May where they said that IBM sovereign core is now generally available. And this is a product that's built specifically to let large regulated organizations run AI within their own controlled infrastructure rather than a public hyperscaler cloud.

Um, so I say all this because this is one of these legacy businesses that has been working to pivot. We are continuing to see that the growth story is far behind a lot of the competitors. you know, revenue growth in Q2 was only up about 1% year-over-year.

And I think we're seeing that stock reaction and how the stock has been depressed uh over the last month and year plus is, you know, investor frustration. It's not overreaction to one bad quarter.

IBM shares dropped about 30% after the Q2 report.

Um, and so I think we're seeing a business that's been actively punished uh by the market. And that's actually one of the reasons I wanted to bring it up because I do think this is a stock that is undervalued relative to its long-term growth potential.

You know, we saw that IBM signed a letter of intent during Q2 to build a US quantum chip foundry. And separately, management has said that they plan to invest more than 10 billion dollars in quantum computing over the next 5 years.

This is positioning IBM to be one of the only companies with both the classical and quantum sovereign infrastructure capability for government uh customers. They recently introduced an AI coding tool.

Um, and then again, as I noted, they are pushing into this sovereign AI space with some of the recent products that they've introduced.

So, a company to watch if you're looking for maybe a more contrarian pick.

Um, I would take a second look at IBM. Yeah, definitely. Rachel, one of the things that you mentioned there was the Sovereign Core, uh, that software solution. I think that's something that they called out on both their quarter one earnings and also like you stated um in recent conferences and just so investors know a little bit more about it uh they mentioned that soft this is a software that lets organizations run AI workloads under their own operational authority within a defined jurisdiction and auditable controls.

They see sovereignity becoming a bigger factor in where and how workloads run. every enterprise and every nation is waking up to the same reality.

Uh so this is pretty much what we're hearing across the map. Rachel, I'm pretty excited that we did this episode because similar kind of discussion um and phrasing was shared by Palanteer CEO and similar type of phrasing is shared by Nvidia CEO and other players that are also focusing in this AI space.

Uh so yeah the sovereign sovereign core software solution is something that we should see how the adoption rate picks up on that

>> agreed and I think you know when you're looking at this business right now be we are seeing that their core legacy businesses are shrinking or flat they've had to walk back their fullear growth guidance all of those risks are on the table to be aware of the sovereign AI

you know right now you're looking at a business that in aggregate only grew revenue by around you know 1% last quarter but the sovereign core product and then particularly their push into quantum computing I do think that these are both areas where we can really see a revitalization of this business over the next several years

so if you're a long-term investor you're looking for a more valueoriented contrarian pick maybe at least one to have on your watch list And third, kind of the software player here that can provide various solution and has various kind of road um research and development progress with the quantum space as well.