Forecast: This tech stock that has received little attention so far will outperform Nvidia and Apple by 2030

Technology giants Apple (AAPL -0.68%) And NVIDIA (NVDA -2.10%) are on top of the world today. They are the two most valuable stocks on the market and have delivered above-average returns over the past five years. Apple's total return delivered a compound annual growth rate (CAGR) of 36% during this period. Nvidia shot even higher, with a CAGR of 100% over five years. The boom in artificial intelligence (AI) has been extremely beneficial for Nvidia investors.

They made these massive gains in a strong era for the overall market, but the S&P500 The index looks downright sleepy in comparison:

AAPL Total Return data by YCharts

It would be cool if Nvidia and Apple continued to be so successful. Invest in the biggest, coolest names in the market, sit back, relax, and let them deliver more of the good stuff in the years to come. Unfortunately, at today's massive market caps – $3.1 trillion for Nvidia and $3.4 trillion for Apple – I fear both stocks are a bit overvalued. I know that's like comparing mountains of cash to streams of revenue, but those two market caps combined make up about 23% of America's gross domestic product.

I think that's too much. Apple and Nvidia may be overdue for a painful correction. At best, I don't expect them to go much higher any time soon.

At the same time, good old International Business Machines (IBM -0.14%) is gaining ground in the AI ​​space, and its stock is undervalued today. I don't expect IBM stock to cross the trillion-dollar mark in the next five years, but it should certainly rise as Big Blue's enterprise-class AI tools boost the stock's value. Most investors don't yet see this traditional computing giant as a promising AI investment. That's a big mistake.

Don’t forget IBM’s cash profit capabilities

IBM's valuation ratios do not look particularly exciting at first glance. The stock changes hands at 22 times the last twelve months' earnings and 2.9 times sales. These are perfectly acceptable averages for mature companies, just below the averages of the S&P500 And Dow Jones Industrial Average market indices.

Then you look at IBM's price to free cash flow (P/FCF) ratio, and the stock suddenly looks different. If you calculate IBM's value based on its massive cash profits, the stock seems more like it belongs in Wall Street's bargain bin. That ratio ends up at 14 times free cash flow, a little more than half of the S&P 500 or Dow Jones' Measurement values.

Cash is king, and IBM has plenty of it. The company's high cash earnings and relatively modest profit show that Big Blue's accountants are very good at reducing taxable profits while putting plenty of real money in the bank. I consider cash flow a higher-value measure of profitability, so it's easy to overlook IBM's modest price-to-earnings ratio.

IBM's place in the AI ​​boom

Remember the five-year chart I showed you? The IBM chart for the same period looks quite different:

IBM Total Return Level data from YCharts

The stock has underperformed broad market indices for many years as it has transformed a hardware-heavy business model into a more profitable software and services offering. In particular, you should know that the revamped Big Blue has a strong focus on cloud computing, data security and AI tools.

Yes, this company was a leading AI researcher long before the release of ChatGPT opened the floodgates for AI investment. Many investors seem to have missed this connection, as IBM's business results did not immediately skyrocket in this emerging AI era. The big AI contracts are coming, just a little late.

IBM is happy to leave consumer-friendly ideas like ChatGPT-style chatbots to other technology providers. This company instead always goes after large enterprise contracts, adding extra layers of security, business-friendly data analytics, and lawsuit-defying data tracking to the mix. Potential customers may need several quarters to test and approve the resulting AI recipe, but the end result is a lucrative long-term deal that won't be easily replaced.

The approvals are coming in now and are creating a solid revenue stream for the future. Market makers are still not paying attention, so IBM stock continues to trade at incredibly low cash flow ratios. I can't wait to see what happens in a few years when the AI ​​contracts have become generous and highly profitable revenue streams.

And one more thing…

I'll admit that Nvidia and Apple are also generating solid cash profits. However, those high-quality profits are already covered by their sky-high stock prices. Apple's P/FCF ratio is 33 today and Nvidia's is shooting up to 79 times free cash flow.

Thanks, but no thanks. I'd much rather buy IBM's undervalued stock instead.