The artificial intelligence (AI) boom is reshuffling the technology industry, minting new winners and leaving others behind. International Business Machines (NYSE: IBM) and Cisco Systems (NASDAQ: CSCO) certainly looked like they were missing the AI boat over the past couple of years, but both companies now have AI strategies that are on track to bring in billions in annual revenue.
International Business Machines
Not every company can slap ChatGPT into its employee-facing or customer-facing applications and call it a day. Large enterprises and organizations must deal with regulatory and compliance concerns, keep proprietary and customer data safe, and ensure they don't hurt their brand with a rogue AI agent.
The latest and greatest large language models garner the most headlines, but IBM is playing an important and potentially lucrative role enabling generative AI technology for its enterprise customers. The company's watsonx platform puts a focus on transparency and governance, and its vast consulting business provides the guidance and implementation services necessary for clients to unlock value from AI.
Imagine a financial institution running decades-old, mission-critical, highly sensitive mainframe code written in a now-obscure programming language. If that financial institution wanted to modernize that code using AI, it needs a partner that it can trust with its code. IBM and its watsonx Code Assistant is a natural choice.
It's taken IBM a long time to translate its decades of AI experience into a viable business, but the company now seems to have cracked the code. IBM has booked more than $2 billion worth of business since launching the watsonx platform about a year ago, with three-quarters of that total coming from consulting signings. That number will likely grow at a solid rate as enterprises increasingly adopt AI technology.
IBM stock is now closing in on its all-time high after years of underperformance. With shares trading at about 15 times forward free cash flow, it's not too late to buy the stock.
Cisco Systems
Cisco remains the dominant leader in the enterprise switching and routing market, but large cloud companies have increasingly been choosing alternatives for their networking needs. In late 2022, original design manufacturers had captured about half of the hyperscale data center switch market, Arista Networks was in second place with a 30% share, and Cisco was in a distant third place with just a 10% share of the market.
This situation is particularly problematic for Cisco because it's the hyperscalers that are buying up AI accelerators and building out massive AI data centers. The company has made some changes over the past few years, embracing disaggregation and breaking the tight coupling between its hardware and its software. Hyperscalers have unique networking requirements that often aren't met by fully integrated solutions.
Cisco is starting to see some upside from its shifted strategy. In the company's latest quarter, product order growth from hyperscalers was in the double digits. This helped drive cumulative AI orders beyond $1 billion in the latest quarter. Three of the top four hyperscalers are deploying the company's Ethernet AI fabric, and the company expects an additional $1 billion of AI product orders in fiscal 2025.
Those AI orders will contribute to the company's expected $55 billion to $56.2 billion of revenue in fiscal 2025, along with adjusted earnings per share between $3.52 and $3.58. With Cisco stock trading for about 14 times forward earnings, investors shouldn't ignore this old-school tech giant.
Before you buy stock in International Business Machines, consider this:
