2 Tech Stocks to Buy Hand Over Fist

February 27, 2025February 19, 2025 Editor

Tech stocks don’t always go hand in hand with high risk. International Business Machines (IBM) and AT&T (T) are two examples of tech stocks that have been delivering exceptional returns to investors while being relatively safe choices.

While neither IBM nor AT&T are going to 10x anytime soon, both stocks look like great long-term buys.

Winning big from the AI shakeup

While tech giants like Microsoft and Meta are dumping tens of billions of dollars into building massive AI data centers on the questionable assumption that advanced AI models with need an ever-increasing amount of computing capacity, IBM is doing things differently.

Pairing its Watsonx AI software platform with its vast consulting arm, IBM is focused on enabling clients to boost efficiency, cut costs, and increase productivity with AI. The company’s home-grown Granite AI models are compact, cheap, and can be fine-tuned for specific tasks. Compared to using a general-purpose AI model, a fine-tuned version of IBM’s latest generation of Granite models can be run for less than 5% of the cost in some cases.

With the recent revelation that DeepSeek, a Chinese AI company, managed to produce an AI model that can compete with the best from Open AI, Anthropic, and other U.S. AI companies for a fraction of the cost, the AI industry now faces some serious questions. For starters: Will spending mountains of cash building out AI data centers produce an acceptable return on investment? Cheap AI models could boost overall demand for AI, but they could also reduce the need for the most powerful AI accelerators.

The DeepSeek development plays right into IBM’s strategy. The cheaper and more accessible AI becomes, the better the return on investment IBM’s clients will achieve by deploying AI applications and agents on its Watsonx platform, and the higher the demand for AI consulting services. IBM has now booked over $5 billion worth of generative-AI-related business, and the sea change in the AI industry has the potential to push that number much higher over time.

IBM now expects to grow overall revenue by more than 5% annually, with a shift toward software pushing up profit margins along the way. The company’s AI business will be one of the key drivers of this growth. With the AI industry in flux following DeepSeek’s achievement, IBM’s focus on efficient AI looks like a winning strategy.

Growing free cash flow

Telecom giant AT&T has managed to put a long period of poor decisions behind it. The company wasted billions on pricey media acquisitions, and while its balance sheet is still feeling some pain from the incurred debt, AT&T has just about fully exited the media business. With the closing of the sale of its remaining stake of DirecTV later this year, AT&T will be back to being a pure telecom company.

Already, the decision to focus on its core strengths is paying off. AT&T has been consistently winning wireless subscribers, its fiber internet business is thriving, and bundling of the two services offers the opportunity to boost profits. Customers with both wireless and fiber from AT&T have lower churn rates and higher lifetime values. In the wireless industry where providers look to steal customers with big discounts on new phones, finding other ways to hold onto customers is a winning strategy.

Excluding contributions from DirecTV, AT&T generated free cash flow of $15.3 billion in 2024. Thanks to its growing wireless and fiber businesses, as well as an ongoing cost-cutting program, AT&T expects free cash flow to surpass $16 billion this year and grow to more than $18 billion in 2027. With a market capitalization of around $187 billion, the stock trades for a bit more than 10 times that 2027 free cash flow estimate.

AT&T stock has surged over the past year, pushing the dividend yield down to about 4.3%. Dividend growth will likely be sluggish, but the company plans to spend at least $20 billion on share buybacks over the next three years. With the valuation still attractive, this buyback-focused strategy makes a lot of sense.

AT&T isn’t a high-flying growth stock, but the strength of the company’s wireless and fiber businesses can continue to push the stock higher over the next few years.

This article was originally published on this site