Watson Will Play Key Role in Future of International Business Machines Corp. (IBM)

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International Business Machines Corp.(NYSE:IBM) is betting big on cognitive computing as an area of growth, its core business of selling PC’s servers and mainframes come under immense pressure. The tech giant is making a dramatic shift into a realm that is constantly developing and changing, further arousing question of whether it is the right call.

IBM Watson Credentials

Spearheading big blues efforts on this front is its technology platform, Watson that uses artificial intelligence to make meaning of vast amounts of unstructured data. The platform is steadily becoming a popular move for brands looking to make good use of data for marketing efforts.

With Watson, IBM is mainly trying to make a name for itself in the development of smart computers. Such computers will play an important role in future especially when it comes to analyzing and making meaning of vast amount of data.

New Opportunities for Growth

Given the robust growth in the internet of things, opportunities for growth on this front are endless and should help offset weakness in the tech giant’s core business. IBM Watson has already shown how competitive it can be in taking humans head on television show Jeopardy.

Away from battling humans, the artificial intelligence platform is now expanding its capabilities into healthcare, pharmaceuticals, finance, and education. Focusing on these new areas of growth should define IBM going forward given the vast amount of data up for analysis.

Since the beginning of the year, IBM has closed deals involving Watson and cognitive computing. It has already collaborated Health Company Bausch + Lomb that is to use the AI platform for cataract surgeries. Watson also recently helped developed a ‘cognitive dress’ won at the just concluded Met Gala.

Cognitive Computing Growing Revenue Base

Last year the cognitive computing business accounted for 35% of the company’s total $81 billion revenue. Given that it is the fastest growing segment, overall sales should exceed the core business in few years’ time, at the current rate of growth. Watson whose capabilities and areas of operations continue to increase should be the driver of any expected growth.

Cognitive systems becoming popular in the world is what International Business Machines Corp. (NYSE:IBM) needs the most to ramp up earnings on this front. Given that the company is recognized as a growing leader in the space, it stands to enjoy the benefits of being the first one to develop user-friendly systems.

Possible Headwinds to Expected Growth

The major headwind that IBM faces on its push to ramp up revenues from its cognitive business is the cost of developing systems for different fields. Licensing fees for such systems once established tend to be quite high, beyond the budget of most companies.

The hardware used by Watson costs about $3 million, meaning that big blue has to charge customers at this range to justify its investment. Some companies continue to utilize old systems or technical know-how to analyze vast amounts of data. If IBM is to entice such firms to join the bandwagon, it then needs to find a way of lowering the costs associated with such systems.

Bottom Line

International Business Machines Corp. (NYSE:IBM) has spent lots of money and time in the development of Watson. It now needs to generate high levels of revenue to justify the investment if the same is to have an impact on investor confidence on the stock going forward.

Given that earnings have been dropping in the recent past, focusing on revenue generation with Watson is no longer an option. This is the only way the tech giant will able to justify capital expenditure that continues to outperform revenues.

There is no doubt that there is some risk associated with the cognitive market as it is still in the development phase. However, if demand for Watson continues to grow, International Business Machines Corp. (NYSE:IBM) should be able to generate a substantial amount of revenue from the same, to offset weakness in the core business.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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