How Watson Can Boost IBM’s Top Line

International Business Machines (NYSE:IBM) is trying to rebuild its business by moving away from hardware and focusing on enterprise services. Even though more than 57% of its value stems from software business (middleware and operating system), the fast changing delivery mechanism for software (Cloud Software as a Service) and its deployment has affected top line growth in more than one way. IBM’s middleware is expected to lose its sheen as application development moves to cloud. However, IBM has carefully maneuvered itself into the next wave of tech growth that relies heavily on big data analytics. Its cognitive computing system, Watson, is catering to cloud-based big data analytics. In this note, we explore Watson’s solution for enterprises. Watson is a technology platform that uses natural language processing and machine learning to derive analytic conclusions from enormous sets of unstructured data. Using these techniques from the academic discipline of Artificial Intelligence, Watson is a highly advanced software system designed to run on a range of IBM’s high performance computing systems.

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Why Watson Is Important For IBM?

According to market research store, the Global Artificial Intelligence market is poised to grow at a CAGR of more than 25% through 2014 to 2022 in order to reach approximately $40 billion by 2022. ^[1]  The report states that the key drivers of market growth include adoption of digital assistance system in healthcare and transportation. However, business intelligence is fast becoming the sector targeted by AI systems. According to Market and Markets, business intelligence and analytics software market would be worth $26.78 billion by 2020. ^[2] Furthermore, due to the increase of cloud adoption, the Small and Medium Business (SMB) market in Business Intelligence and Analytics market looks promising.

As proliferation of data sets in, need for analytic tools will increase as business intelligence needs detailed analysis of large volume of data that can be both structured and unstructured. IBM has over 500 patents in AI and has been first to deploy it as a viable solution for Business Intelligence (BI) and healthcare services. ^[3] IBM claims that Watson is the first commercially available cognitive computing  system in the market. To roll out services for enterprise, initially IBM established two business units: Watson, established (in 2014) for the development and commercialization of cloud-delivered cognitive computing technologies and Watson Health (2015) dedicated to improving the ability of doctors and researchers to surface new insights from the massive amount of health data being created daily to deliver personalized healthcare. ^[4]

Currently, IBM’s global business services makes up 11.5% of IBM’s value and contributed $15 billion to topline. However, given the need for sophisticated BI tools and increasing usage of high performance data analytics in the coming years, IBM stands to make good money from its Watson Analytics solution. ^[5] If IBM captures 10% of the AI analytics market, it can make around $4billon in revenues by 2022. This would result in a 5% potential upside to our stock price estimate.

At present, we have a $154 Trefis price estimate for IBM, which is about 12% higher than the current market price.

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More Trefis Research

1. Artificial Intelligence Market Outlook – Global Trends, Forecast, and Opportunity Assessment (2014-2022), November 2015 [↩]
2. Business Intelligence and Analytics Software Market worth $26.78 Billion by 2020 [↩]
3. Artificial Intelligence: The Future is Finally Here, November 6 2015 [↩]
4. Read more about it here [↩]
5. See here for Watson Analytics [↩]