The generative AI boom has brought significant success to chip designer Nvidia and software and services veteran IBM. However, when it comes to investing in AI stocks in the summer of 2024, which tech titan is the better choice? Let’s examine the facts.
Nvidia, once overshadowed by cryptocurrency mining and declining consumer interest in gaming gear, experienced a remarkable turnaround with the rise of generative AI. As the go-to supplier of AI accelerator hardware, Nvidia’s sales skyrocketed by 262% year-over-year in the first quarter of 2024. The company’s earnings and cash flows have surged, leading to a tenfold increase in its stock price since October 2022. However, despite its financial success, Nvidia’s valuation appears overinflated, making it a cautious investment at its current levels.
On the other hand, IBM has undergone a drastic strategy shift, focusing on software and services rather than hardware. While it took time for the market to recognize IBM’s AI prospects, the company’s exclusive focus on enterprise-scale clients has paid off. IBM’s AI solutions under the Watson banner have generated $2 billion in orders in the second quarter of 2024, a significant increase from zero a year ago. With a strong pipeline of multi-year contracts, IBM’s software growth guidance has been raised, and CEO Arvind Krishna expects double-digit growth rates in 2025 and beyond.
Compared to Nvidia’s volatile growth driven by chip sales, IBM’s AI growth is more stable and likely to have long-lasting consequences. Additionally, IBM’s valuation ratios appear undervalued when compared to Nvidia’s lofty multiples. While Wall Street has been slow to embrace IBM’s strategy shift, the next few years will demonstrate the effectiveness of the company’s focus on software, services, cloud computing, and AI.