IBM: Potential In AI?

| About: International Business (IBM)

Summary

IBM continues to trade at a discount valuation.

However, investors are putting most of their eggs in the AI basket.

Companies such as Microsoft and Amazon have been more successful at commercializing cloud computing.

Nevertheless, IBM could still see significant upside if AI initiatives prove successful.

I'll hold my own feet to the fire - my last article was overly optimistic on IBM (NYSE:IBM).

IBM is a company that has managed to reduce its dependency on hardware sales and ramp up its AI and cloud offerings - something which I had commended the company for previously. However, my prior analysis had presented the company as building a highly sophisticated cloud infrastructure that would put the company at a significant advantage to its peers.

In reality, IBM may be ramping up its cloud offerings, but its big bet remains with Watson. While IBM has managed to make advances in the area of cloud, the company has not been able to achieve the success enjoyed by competitors such as Amazon (NASDAQ:AMZN) or Microsoft (NASDAQ:MSFT). The server capacity of AWS far exceeds that of its rivals including IBM, while Microsoft Azure has been much more successful commercially due to Microsoft's subscription model allowing for more attractive price offerings and integration with other Microsoft products.

In this light, IBM may be advancing its cloud capabilities, but don't expect that it can compete with the likes of Amazon or Microsoft. There is a reason IBM is relatively cheap on a valuation basis - the company's future is far more uncertain. While cloud computing has become an established industry, the demand for AI remains somewhat hazy from a commercial standpoint.

With that being said, the company could be set to see quite significant demand for this technology. I had already mentioned that IBM is working with Medtronic (NYSE:MDT) on the Watson Health cognitive computing technology in an effort to revolutionize diabetes treatment - a technology which would likely see very significant demand if successful. Moreover, one of the first big tests of eventual success in cognitive computing is the company's launch of the Watson IoT consulting services - which allows companies to harness cognitive computing in data analysis and innovation initiatives. According to Forrester, 60 percent of key decision-makers at global companies intend to use IoT-enabled applications over the next two years, and growing uptake of the same will likely be indicative of the eventual success of AI from a commercial standpoint.

Ultimately, IBM can be argued to have a significant margin of safety given the cheap valuation. Of course, IBM as an investment is more uncertain and an investor is putting most of their eggs in the AI basket. This stock is somewhat riskier than I thought, but could still be a success if AI demand continues to grow.

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.