IBM: Riskier, But The Payoff Could Be Greater

| July 17, 2017 | 0 Comments

IBM (IBM ) has taken a more speculative approach to the area of machine learning than competitors such as Microsoft (MSFT ) or Amazon (AMZN ). As it stands, technology companies have recognised the value of providing effective tools to both capture vast amounts of data efficiently and analyse that data in innovative ways. Currently, over 99% of the world’s data remains unanalysed, and thus there is a great demand for effective technologies to be able to do this. Services such as Microsoft’s Azure and Amazon Web Services have been the leaders in the area of cloud computing, providing large cloud storage capabilities along with data science based applications to be able to make sense of collected data. However, the human element remains key within such applications – the tools are there for effective data analysis, but it is up to the developer to implement effective solutions to implement such analysis. IBM has not excelled in this area to the extent that competitors have. However, IBM is taking somewhat of a different approach in attempting to differentiate its offerings in the marketplace. Specifically, IBM is relying far more on the area of artificial intelligence to make its mark. The idea behind artificial intelligence is that machines rather than humans (Watson being a prime example) will start to use data to automate data-based decisions. Instead of a programmer manually designing an algorithm that can implement data-based decisions, computers will “automate” this process through artificial intelligence. As one example, IBM has partnered with firms such as Medtronic (MDT ) to develop effective blood sugar and insulin monitoring devices which have the ability to prevent the spread of diabetes. The Watson computer has also been touted as having significant capabilities in the world of finance, with capabilities such as allowing banking consumers to more accurately gauge financial health through collating a vast number of financial transactions from different sources. Essentially, the aim of Watson is to amalgamate vast amounts of data from different sources and then provide deep data-driven insights to consumers.
As the tech giants have attempted to diversify away from hardware in favour of more cloud-based solutions, IBM is focusing much more of its efforts in artificial intelligence. Granted, companies like Microsoft and Google (NASDAQ:GOOG ) (NASDAQ:GOOGL ) are attempting similar initiatives with services like Project Oxford and Deepmind, but not as deeply as IBM. IBM is taking a bolder – and riskier – strategy in this regard. However, if it can work the payoffs stand to be greater. For instance, IBM’s “Strategic Imperatives” segment has accounted for 42% of revenue in Q1 2017, and 35% of this growth has come from cloud-based services:

Source: IBM 1Q 2017 Earnings Moreover, market caution on IBM might signal a good buying opportunity. We see that while the price has fallen from a high of over $180 in 2017, the company trades at a significantly lower P/E ratio than its peers, which could mean further upside in the event of continued revenue growth for Strategic Imperatives. Share Price

P/E Ratio

Ultimately, IBM seems to be taking more of a gamble with its business model than its peers. Cloud computing and artificial intelligence are fields that are most definitely set for highly significant growth in the future. However, IBM’s vision of this is a lot more concentrated, and it ultimately remains to be seen whether the company’s vision of these fields aligns with that of the market – this is ultimately what investors are concerned with at the end of the day. The rewards with this company could be greater, but so are the risks.

Disclosure: I am/we are long MSFT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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