How Investable are IBM's AI Ambitions?

Here's how Watson could make a comeback.

Andrew Willis 22 March, 2024 | 4:49AM
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The Morningstar Metaverse studio is a virtual creation featuring avatars of real editors and fictional correspondents (like Peter Fay).

Peter Fay: When you talk about AI in action, do you think about one computer? Or do you think about many? Before these computers are put to work, how would they learn about the tasks they're supposed to do? These are the questions that AI investors need to ask because it's at the core of how this technology will evolve.

These are the questions that IBM (IBM) has been putting Watson to work on, and the famous supercomputer has come up with some very interesting ways to integrate AI at an enterprise level. For a long time, to get an AI model to work for your business, you had to train it, which took a while. But what if they could be trained beforehand? IBM's new watsonx AI capabilities offer what are known as foundation models of different business functions, which could be integrated at an enterprise level in a fraction of the time. Wow. Impressive.

A company that gives its mainframe to Watson will be further entrenched with IBM products, which strengthens the company's moat with higher switching costs. These are a few of the things for IBM stock investors to consider, as equity analyst Julie Bhusal Sharma explains.

Julie Bhusal Sharma: IBM's AI and data software success is especially important these days because it could help offset some more cyclical aspects of its business, like its mainframe-related sales. Right now, the stock looks a bit expensive, and we are still conservative on IBM's AI goals, given some past disappointments, including Watson Health, which IBM sold off in 2022. If a Watson turnaround happened, however, it could lead to an increase in IBM's software sales and a boost in IBM Cloud Services. At the moment, though, IBM is still one of the largest IT services companies in the world and brings them big to its moniker Big Blue.

Fay: That legacy is particularly valuable in regulated industries and can help it beat newer cloud-based offerings on the block. The memory block, that is. That's a joke for all the robots in the audience. But in all seriousness, all these AI applications are going to need some real storage, not just any old hard drive. We're talking about faster, smarter global information superhighways. Now, there is one stock leading the industry, but that's a chat for another day.

For Morningstar, I'm Peter Fay.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
International Business Machines Corp183.17 USD2.72Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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