Why IBM’s Cognitive Solutions Segment Makes Up 45% Of Its Value

by Trefis Team
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IBM (NYSE:IBM) launched Watson Solutions for enterprise in 2014. Since then, the company has been aiming to establish itself as the go-to player in the big data analytics space with its Watson cognitive computing system. IBM continues to add functionalities and services to Watson Solutions to strengthen its presence in the data analytics industry. Last year, IBM introduced its first global consulting practice for the internet of things (IoT) on Watson. [1] In 2016, IBM started reporting financial numbers for Cognitive Solutions revenues. In this note, we discuss how valuable the Cognitive Solutions business is for IBM.

See our full analysis on IBM

Sizing Up The Total Addressable Market For Cognitive Solutions

IBM’s Cognitive Solutions segment includes Solutions Software (roughly two-thirds of the segment revenues) and Transaction Processing Software (the remaining third). The Watson platform uses natural language processing (NLP) and machine learning to derive conclusions and insights from large sets of unstructured data. The segment includes many of the company’s strategic areas, including analytics, commerce, and security, as well as several of the new initiatives around Watson, Watson Health, and Watson Internet of Things.

IBM reported that revenues for the division grew by 1.9% to $18.19 billion in 2016. We estimate that IBM’s Cognitive Solutions business accounts for nearly 45% of the company’s value. The primary reason for the high value of this division is the underlying total addressable market (TAM). Based on industry reports, [2] we estimate that the TAM for the company is over $367 billion.

TAM Cognitive

Why Is Cognitive Solutions Important For IBM?

We conservatively estimate that Cognitive Solutions can add over $18.5 billion to IBM’s top line by 2022, a 5% share of the TAM. While the EBITDA margin for this division was 35% in 2016, we estimate that margins will improve to slightly to 36% by 2022 as the company continues to expand its product offerings. Based on these assumptions, we estimate that the value for Cognitive Solutions business is over $80 billion. As the company continues to launch new services, industry offerings and capabilities for enterprise clients, revenues for Cognitive Solutions are likely to grow materially.

We have a $163 Trefis price estimate for IBM, which is nearly in line with the current market price.

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Notes:
  1. IBM Named an Internet of Things Software Platform Leader, Launches Global Watson IoT Consulting Solutions, November 21 2016 []
  2. Grand view research report []
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