International Business Machines Corp. (NYSE:IBM) stock has slumped over the last year, falling as much as 27% in early February. IBM has now posted 15 quarters in a row of year-over-year revenue declines, with an 8.5% drop in its most recent quarter. But IBM stock has rebounded since hitting rock bottom in February, up about 30%. So what gives?
IBM used to be the world’s largest technology company, but it lost its touch with the fast-moving industry. The company seemed to be fresh out of ideas, but in recent years, IBM has been striving to reinvent itself and investors are starting to get a bit excited.
In particular, investors are becoming upbeat on IBM’s transition into cloud computing and data analytics, and more specifically “Watson.”
So, what is Watson?
Back in 2011, IBM made headlines when its Watson artificial intelligence super computer beat two of the most successful contestants of all time in a game of Jeopardy. The contest showed that a computer can “understand” natural human language.
With Watson, IBM is aiming to create a service where massive amounts of data can be analyzed, learning from the results and gaining intelligent insights. Watson processes information in a similar manner to how people think.
IBM is betting big on Watson, but the potential payoff is huge. In 2014, Big Blue invested $1.0 billion to create a new business unit dedicated to Watson, called the Watson Group. The new division consists of about 2,000 employees.
Morgan Stanley analyst Katy Huberty believes Watson is going to be a big catalyst for IBM stock. Huberty reiterated an “Overweight” rating on IBM stock and increased her price target from $140.00 to $168.00. But she believes that if the Watson business takes off, IBM stock could soar to $195.00. (Source: “IBM’s Watson Is Significant, Says Morgan Stanley, Investors Just Have to Get It,” Barron’s, March 31, 2016.) That implies an upside in IBM stock of about 36%.
Huberty believes that Watson is going to double the number of customers is has this year and that “after aggressive hiring and an estimated $5B in data acquisitions over the past two quarters, IBM is beginning to show a path toward revenue monetization in Watson.” (Source: Ibid.)
Huberty hasn’t made any sales forecasts for Watson, but she is confident that the recent partnerships IBM has signed, such as with Japan’s SoftBank Group Corp (TYO:9984) and Johnson & Johnson (NYSE:JNJ), will be able to generate revenue in many sectors of the economy such as healthcare.
Speaking of healthcare, IBM is making a major push into the industry. In the past year, IBM acquired two healthcare companies, Phytel and Explorys. Explorys is a healthcare database that has 315 billion data points, while Phytel is a platform that will help IBM analyze the data collected from Explorys. (Source: “Will Watson Health Cloud Pay off for International Business Machines Corp.? (IBM)” InvestorPlace, February 25, 2016.) The acquisitions will add to the capabilities of Watson.
In addition to Johnson & Johnson, IBM has also partnered as a data collector with Medtronic, Inc. (NYSE:MDT) and several other companies. IBM will be able to use the data it collects from the company’s medical devices and use that information to help businesses and hospitals treat diseases, for example.
In its latest move to beef up Watson, IBM acquired Truven Health Analytics in February for $2.6 billion. The acquisition will add 200 million records to Watson’s data collection. (Source: “Why IBM Is Dropping $2.6 Billion on Truven Health,” Fortune, February 18, 2016.)
All in all, it’s easy to see why IBM is investing so much into healthcare analytics. According to research firm IQ4I Research and Consultancy Pvt., the global healthcare analytics markets will be worth $20.8 billion by 2020. (Source: “Healthcare Analytics Global Market and Estimated to be Worth $20.8 Billion by 2020,” Pr.com, September 22, 2014.)
IBM is looking to dominate the market and so far, it looks like it will with the help of Watson. The initiatives should add to IBM’s “strategic imperatives” business segment—cloud, analytics, mobile, social, and security services. In IBM’s latest earnings report, strategic imperatives revenue increased 17%. (Source: “IBM Reports 2015 Fourth-Quarter and Full-Year Results,” International Business Machines Corp., January 19, 2016.)
The Bottom Line on IBM Stock
Watson’s scope also extends outside of healthcare. In October, IBM also announced plans to acquire The Weather Channel’s business-to-business, mobile, and cloud-based properties. IBM plans to use the massive amounts of data it will be collecting to service clients in the media, energy, aviation, and insurance industries.
This is just the beginning in IBM’s quest to conquer data analytics with Watson. If IBM’s data analytics bet pays off, IBM stock should follow suit.