Investor Essentials Daily

The Big Blue could rise again

International Business Machines (IBM)
May 29, 2024

International Business Machines (IBM), once a dominant force in computing, faced significant challenges adapting to the rise of personal computers and client-server architecture, leading to a loss of market share to competitors like Microsoft (MSFT) and Apple (AAPL).

Despite declining annual revenues from $100 billion to $60 billion, IBM has shifted its focus towards high-growth areas such as cloud computing and artificial intelligence.

Initiatives like the AI-powered Watson platform, substantial investments in AI technology, and strategic acquisitions signal IBM’s commitment to revamping its business model.

However, market skepticism remains, with poor growth expectations.

Nonetheless, IBM’s extensive AI investments could enable it to surpass these projections and realize substantial growth from its AI-driven transformation.

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Yesterday, we discussed Dell (DELL), a company that the market views as lacking further growth potential. However, Dell could have significant room for growth thanks to opportunities in the AI sector.

Today, we examine a similar situation but with a different company – International Business Machines (IBM).

IBM is one of the oldest and most established technology companies, becoming the industry leader in computing and once the largest company by market cap.

However, as the computer industry evolved with the rise of personal computers in the 1980s and client-server architecture in the 1990s, IBM struggled to adapt and lost market share to more agile competitors like Microsoft (MSFT) and Apple (AAPL).

By the 2010s, the market perceived IBM as a slow-moving conglomerate without meaningful growth potential. IBM’s annual revenues continued to fall for nearly a decade, from $100 billion to $60 billion.

Investors and analysts were skeptical that IBM could successfully transition from its legacy hardware and services businesses to higher-growth opportunities in cloud, AI, and other emerging technologies.

Over the past several years, IBM has made significant investments and progress in artificial intelligence that indicate substantial upside potential if successful.

As early as 2015, IBM began heavily promoting its AI-powered Watson platform for business applications. Since then, IBM has invested billions of dollars organically developing AI technologies and making strategic acquisitions to build capabilities in core AI areas like machine learning, natural language processing, computer vision, and more.

Some of IBM’s most significant AI-related initiatives and investments include developing a large portfolio of open-source AI models and tooling through projects like OpenScale and AI Fairness 360 in order to drive greater adoption of IBM’s technologies.

The company has also undertaken extensive employee training through the IBM AI Academy initiative to develop an internal talent pool of hundreds of thousands of workers skilled in AI.

On the acquisition front, IBM has purchased major companies such as Red Hat, The Weather Company, and TruQua to gain valuable data assets and domain expertise in adjacent areas where AI is poised to create significant value.

The centerpiece of IBM’s AI strategy remains the Watson platform, which now includes over 30 distinct services that clients can leverage to develop and deploy AI-powered applications across their organizations and industries.

Additionally, through offerings like the IBM Watson Studio environment, Big Blue aims to provide AI developers and data scientists with robust collaboration tools.

By strategically expanding the capabilities of Watson to Amazon Web Services, IBM seeks to make its AI tools and services more accessible to the vast global community of AWS developers.

This move could help drive increased adoption and monetization of IBM’s considerable AI investments.

While IBM’s financial performance has remained mixed in recent years, the scale of investments it has made into artificial intelligence indicates the company sees significant potential for growth if it can successfully transform.

However, our EEA shows that the market remains skeptical with lackluster expectations for only 3% Uniform asset growth and 20.5% Uniform return on assets ”ROA” over the coming years.

With continued focus and execution of its AI strategy, IBM is well-positioned to potentially outperform these low expectations and deliver upside from its AI-driven transformation in the years ahead.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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