The Monthly Gems by Allan Tong IBM Common Stock IBM-N TOP PICK Feb 04, 2025

It's still inexpensive, still has upside at 22x PE.

He owns MSFT, and it's also involved in quantum computing. Other names to think about are GOOG, AMZN, and Toshiba from Japan.

If you double your money, do the smart thing and sell half. These tech stocks are 3x riskier than the market if interest rates go up. It's about managing risk in your portfolio. 

There are better tech stocks, like MSFT and Google. It's been restructuring for many, many years. They've acquired some prudent companies, but also carry many legacy assets that are obsolete in the current world.

It just reported great numbers and shares jumped 13%. Redhat has made this an AI winner. It rallied 34% last year. They've had 6 straight quarters of positive sales growth, leading to an earnings beat and excellent free cash flow. Their full year forecast includes accelerating revenue growth and free cash flow. YOY growth: infrastructure -8%, consulting -2%, software 10% which is the largest segment, amounting to 43% of 2024 revenues. Software got stronger as 2024 wore on, and this segment could make up 50% of IBM's business. Specifically, Red Hat grew 16% YOY in Q4 and automation 15%. Watson X and Red Hat are key growers, enjoying the AI tailwind. Their GenAI business generates over $5 billion of business, growing by $2 billion, quarter-over-quarter. That said, shares went sideways last October given a miss in their consulting business, but the CEO feels AI will return this segment to growth in 2026. Tailwinds: a good backlog, record signing in Q4, and business in GenAI all support accelerating growth in low-single digits. Caveat: their PE is 24x PE and 22x in 2026, instead of around 10x, but their return to steady growth justifies the PE and software will generate more recurring revenue. An indirect AI play that won't be hurt by DeepSeek.

Bought on promise of its AI partnerships. Moved up steadily, but he worried that legacy businesses were lagging. He sold when valuations got into low 20s. Have to know when to buy, and when to sell.

He added it last May, and up 51% since. Today's more fully valued at 23x. Remains a long-term hold, given their AI consulting.

It wasn't seen as an AI play until their partnership with Microsoft. Shares then rallied. He sold around $235 after the PE jumped as its value dropped. 

Legacy tech giants like this have been some of the top names this year and are a good place to hide. They boast strong earnings, reasonable valuations and good growth in AI.

Between hardware and software, higher margins and greater growth still belong to the software side. He's looking more to consulting, with its higher margins.