Invest in These Two Tech Companies Without Hesitation
Tech stocks don't always equate to high risk. Two examples of tech stocks that have been providing solid returns to investors while maintaining a relatively safe profile are International Business Machines (IBM 0.69%) and AT&T (T 0.77%).
While IBM and AT&T might not give you the earth-shattering returns that some tech giants offer, they are nevertheless excellent choices for long-term investments.
Leveraging AI's Potential: IBM's Strategic Move
While technology titans like Microsoft and Meta are investing billions into constructing colossal AI data centers under the questionable assumption that advanced AI models require an ever-increasing amount of computing capacity, IBM is taking a different route.
Pairing its Watsonx AI software platform with its extensive consulting arm, IBM is focusing on helping clients enhance efficiency, decrease expenses, and boost productivity with AI. The company's home-grown Granite AI models are compact, affordable, and can be fine-tuned for specific tasks. Comparing the use of a general-purpose AI model to a fine-tuned version of IBM's latest generation of Granite models, the latter can run for less than 5% of the cost in certain cases.
With the recent announcement that DeepSeek, a Chinese AI company, managed to develop an AI model that can rival the best from Open AI, Anthropic, and other US AI companies at a fraction of the cost, the AI industry is facing serious considerations. Namely, whether dumping billions into building AI data centers will yield a satisfactory return on investment. While cheaper AI models might drive overall demand for AI, they could also reduce the need for the most potent AI accelerators.
The achievement by DeepSeek supports IBM's strategy. The more accessible and affordable AI becomes, the better the returns for IBM's clients, who opt to deploy AI applications and agents on its Watsonx platform. Furthermore, the shift in the AI industry might boost IBM's AI consulting services demand. IBM has already garnered more than $5 billion worth of generative-AI-related business, and this sea change in the AI industry has the potential to significantly increase this number over time.
IBM expects to grow overall revenue by more than 5% annually, with a shift towards software pushing up profit margins. The company's AI business will play a crucial role in this growth. With the AI industry undergoing a transformation following DeepSeek's achievement, IBM's emphasis on efficient AI appears to be a successful strategy.
Free Cash Flow Boost: AT&T's Turnaround
Telecom giant AT&T has successfully overcome a period of poor decisions. The company spent billions on expensive media acquisitions and, while its balance sheet is still grappling with the resulting debt, AT&T is on its way to leaving the media business behind. The sale of its remaining stake in DirecTV is scheduled to complete later this year, making AT&T a pure telecom company once more.
The strategy to refocus on its core strengths is showing results. AT&T has consistently gained wireless subscribers, its fiber internet business is thriving, and the bundling of these services provides the opportunity to boost profits. Customers with both wireless and fiber from AT&T have lower churn rates and higher lifetime values. In the highly competitive wireless industry, where providers often offer significant discounts on new phones to attract customers, finding other ways to keep customers is a winning strategy.
Excluding DircTV contributions, AT&T generated free cash flow of $15.3 billion in 2024. Thanks to the growth of its wireless and fiber businesses, along with ongoing cost-cutting measures, AT&T expects free cash flow to surpass $16 billion in 2025 and reach more than $18 billion in 2027. With a market capitalization of approximately $187 billion, the stock trades at slightly more than 10 times its 2027 free cash flow estimate.
As a result of AT&T stock's surge over the past year, the dividend yield has dipped to around 4.3%. Although growth in dividends will likely be modest, the company plans to invest at least $20 billion in share buybacks over the next three years. Given the stock's attractive valuation, this buyback-focused strategy seems sensible.
AT&T isn't a high-growth stock, but the strength of its wireless and fiber businesses may continue to push the stock upward over the next few years.
- IBM's strategic shift towards efficient AI, as demonstrated by its Granite models, could potentially attract more clients willing to deploy AI applications and agents on its Watsonx platform, contributing to its growth in the AI industry.
- IBM's announcement of a focus on helping clients enhance efficiency, decrease expenses, and boost productivity with AI, rather than investing in large AI data centers, aligns with the recent achievement by DeepSeek, which developed an affordable AI model that can rival top US AI companies.
- AT&T's plan to invest at least $20 billion in share buybacks over the next three years, despite a relatively modest dividend growth, seems sensible given the stock's attractive valuation and its strength in wireless and fiber businesses.
- Tech giant IBM, while maintaining a safe investment profile, has expressed expectations to grow overall revenue by more than 5% annually, with a substantial contribution from its AI business, as the AI industry undergoes transformations driven by companies like DeepSeek.
