Cognitive Solutions To Drive Revenues For IBM In The Future

by Trefis Team
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With the launch of Watson solutions for enterprise in 2014, IBM (NYSE:IBM) ventured into the AI and analytics industry. Since then, the company has added functionalities and services to Watson to strengthen its presence in the data analytics industry. IBM plans to establish itself as the go-to player in the big data analytics space with its Cognitive software solutions. In this note, we discuss how Cognitive software solutions will drive revenue growth at IBM.

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Cognitive Software Solutions To Drive Growth

IBM’s Cognitive Solutions segment includes Solutions Software (roughly two-thirds of the segment revenues) and Transaction Processing Software. 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 $18.2 billion in 2016 and contributed 23% of overall revenues. We estimate that IBM’s Cognitive Solutions business accounts for nearly 52% of the company’s value. The primary reason for the high value of this division is the underlying total addressable market (TAM) and resulting growth potential. According to IDC, worldwide revenues for big data and business analytics (BDA) will grow by a compound annual growth rate (CAGR) of 11.9% through 2020, exceeding $210 billion.

We estimate that Cognitive Solutions can add over $20 billion to IBM’s top line by 2024, and account for nearly 25% of the company’s total revenues. While the segment’s EBITDA margin was 35% in 2016, we estimate that margins will improve slightly to 37% by 2024 as the company continues to expand its product offerings. Based on these assumptions, we estimate the value for Cognitive Solutions business at over $87 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 higher. If the company’s market share in the BDA market were to grow to 11% in 2020, its revenues would reach $23 billion. Further, its revenues could increase to over $28 billion or 31% of total revenues by 2024 in that scenario, resulting in a nearly 20% upside to our $151 price estimate for IBM, which is in line with the current market price.

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