Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Can IBM Survive?

IBM (NYSE: IBM) is a company that should make far more money than it reports.

To explain, IBM offers some very impressive technology. Yet it reported a quarterly net income of $1.672 billion, and a quarterly operating income of $1.956 billion on 30 September 2019. However, IBM reported a quarterly profit of $8.336 billion on 30 September 2019.

IBM keeps unveiling astonishing artificial technology despite the losses. For example, IBM claims its GRAF (Global High-Resolution Atmospheric Forecasting System) can predict the weather 12 hours in advance anywhere on Earth.

Reuters claims, the IBM GRAF can update weather forecasts hourly and predict weather in three square kilometer areas. In contrast, existing forecasting systems cover 10 to 15 square kilometer areas and predict weather every six or 12 hours.

Can IBM make Money from the Weather, GPUs, and Supercomputers?

IBM could make money from the GRAF with global mapping of the atmosphere, selling better weather data, and offering better forecasts. In addition, IBM could build a worldwide open-sourced marketplace for weather data with GRAF.

The GRAF runs on IBM’s POWER9-based supercomputer optimized for Graphics Processing Units (GPUs). Interestingly, the POWER9 is best known for its use in gaming.

IBM could make money with POWER9 because the supercomputer could map complex systems and processes. For instance, POWER9 could map markets, energy production systems, trade patterns, the Cloud, elections, advertising campaigns, streaming video audiences, massive multi-player online games (MMOGs), social media networks, transportation systems, supply chains ecommerce ecosystems, and military campaigns.

IBM tries Open Source Watson

IBM is trying to adapt to the Cloud and the Open-Sourced economy by making its iconic Watson artificial intelligence (AI) available to everybody.

For instance, IBM is making Watson accessible through the cloud via its Watson Anywhere initiative. Watson Anywhere allows you to add Watson AI to your platform. Watson Anywhere serves as an interface between other platforms and IBM’s AI platform.

IBM is Adding AI to Apps

Importantly, IBM is experimenting with AI-driven Apps it calls microservices, Silicon Angle reports. IBM’s AI-powered apps include Watson Assistant and a new Assistant for Voice.

Theoretically, a Watson Assistant could function as a virtual customer service associate or a guide to a digital ecosystem. For instance, the Watson Assistant could teach you how to use a trading platform, or tell you which you insurance policy you need.

Meanwhile, Watson Discovery is an AI-powered search engine that uses natural language and machine learning to talk to humans. Theoretically, Watson Discovery could conduct voice searches of large databases such as an ecommerce platform’s inventory.

Thus, Watson Discovery could give ordinary people with no computer skills access to Big Data. For example, a CEO could ask Watson Discovery for detailed sales reports from one of her company’s subsidiaries.

In the future, the CEO could use Watson Discovery to analyze her company’s finances through her phone while riding the subway to work. Meanwhile, you could use Watson Discovery to manage your investment portfolio, or curate your Spotify playlist.

Could IBM Make Money from AI-Powered Apps?

Therefore, IBM is trying to package Watson as an app. Hence, Watson could be available to everybody through the Apple App Store, GitHub, or GooglePlay soon. The profit from AI-Driven apps could be huge.

Artificial Intelligence could add $15.7 trillion to the global economy by 2030, PricewaterhouseCoopers estimates. Moreover, AI could boost nations’ gross domestic products (GDP) by 27% by 2030.

IBM could profit from the AI explosion by building the infrastructure the AI operates on. In addition, IBM can make money by selling AI-Powered Apps under the Watson brand name.

Is IBM Making Money from AI?

IBM (NYSE: IBM) is making some money from AI. IBM reported a quarterly operating cash flow of $3.619 billion and a quarterly free cash flow of $2.937 billion on 30 September 2019.

Those numbers were up from $2.941 billion and $2.511 billion on 30 June 2019. Hence, IBM’s business still generates a lot of cash.

In addition, IBM had $10.958 billion in cash and short-term investments on 30 September 2019. Dramatically, that number was down from $44.408 billion in cash and short-term investments on 30 June 2019.

IBM’s Business is shrinking

Hence, IBM is still a cash-rich company, but it is a cash-rich company plagued by shrinking revenues. IBM’s quarterly revenues fell from $19.161 billion on 30 June 2019 to $18.028 billion on 30 September 2019.

Moreover, Stockrow reports IBM’s revenue growth rate has shrank for four straight quarters. In detail, IBM had a negative revenue growth rate of -2.07% on 30 September 2018, a negative revenue growth rate of -3.46% on 31 December 2019, -4.67%% on 31 March 2019, -4.21% on 30 June 2019, and -3.88% on 30 September 2019.

Therefore, IBM’s business is shrinking as some of its technological capabilities increase.

IBM fails in the Cloud

I think IBM’s revenues are shrinking because the company missed out on the Cloud Boom.

For instance, Gartner estimates IBM’s 2018 share of the global cloud market at 1.8%. In contrast, cloud leader Amazon (NASDAQ: AMZN) Web Services’ (AWS) global cloud market share was 47.8% in 2018.

However, IBM’s global cloud market share grew by 24.7% between 2017 and 2018. Gartner estimates IBM’s Global Cloud revenues at $577 million in 2018. In contrast, Gartner estimates Amazon’s 2018 Global Cloud revenues at $15.495 billion for 2018.

Thus, IBM is having a hard time penetrating the cloud market. That could be fatal because I think the cloud is the future of Big Data and computing. However, I think artificial intelligence on the Cloud could be big business.

For instance, people will need to access and manage all the data they put on the Cloud. Watson Discovery could manage that data and make the data accessible to ordinary people.

Overall, Gartner estimates the Global Market for infrastructure as a service (IaaS) grew by 31.3% in 2018 to $32.4 billion from $24.7 billion in 2017. Thus there is a lot of room for IBM to grow and make money in the cloud.

Is IBM a Value Investment?

I think IBM is a value investment because of its AI and IaaS capabilities. In particular, I think IBM could make a lot of money by selling AI-powered Apps.

Moreover, I think IBM’s Red Hat subsidiary could be worth a lot of money. Notably, Red Hat reported revenues of $879 million in 4th Quarter 2018, a press release reveals. Those revenues grew by 14% between 4th Quarter 2017 and 4th Quarter 2018.

Red Hat profits from the cloud by providing open sourced Linux-based software and applications. IBM bought Red Hat for $34 billion in July 2019. IBM’s goal at Red Hat is to create a hybrid cloud that combines IBM’s AI and infrastructure capabilities with Red Hat’s Linux expertise.

However, Linux is a tiny player in the global operating system market. Statcounter estimates just 0.81% of the world’s devices ran on Linux in October 2019. However, NetMarketShare estimates Linux had a 1.5% share of the operating system market in October 2019.

Given the numbers, I think Mr. Market overpriced IBM at $133.84 on 21 November 2019. IBM is a good company with some great technology but its share price is too high.

Is IBM a Good Dividend Stock?

Conversely, I think IBM (NYSE: IBM) is a good dividend stock. For instance, IBM paid a $1.62 quarterly dividend on 8 August 2019.

Furthermore, IBM’s dividend grew by 5₵ in 2019. To clarify, IBM paid a $1.57 dividend on 7 February 2019 and $1.62 on 9 May 2019.

Overall, IBM shareholders received a dividend yield of 4.86%, an annualized $6.48, and a payout ratio of 50.65% on 21 November 2019. reports IBM’s Dividends have been growing for 19 years.

In the final analysis, I consider IBM a good dividend stock with a low margin of safety. The margin of safety is low because IBM’s revenues are shrinking.

Conversely, I think IBM could make money and pay dividends for years to come. Yet investors need to be careful with IBM because it operates in a dramatically changing business.