105-year-old IBM is overwhelmed by reform. Can artificial intelligence save it?

Some companies embrace reform, while others are overwhelmed by it. In recent years, IBM 's stock has performed poorly because investors simply don't know which sector it belongs to.

IBM, the Armonk, New York-based technology giant, turned 105 this June, but even before Ginni Rometty took over as CEO in 2012, the company was stuck at a crossroads. The old computing technology, servers and mainframes, on which IBM and its suit-wearing consultants built their monopoly in the 20th century had become obsolete. IBM knew its future lay in the cloud and artificial intelligence, and Rometty was adamant about that. But the old tech company was falling faster than the newcomers were rising. Revenue fell for 16 straight quarters, to $81.7 billion in 2015. And IBM’s stock price has fallen 30% since its peak in March 2013, leaving it 62% behind the S&P 500. "We don't know when this is going to end," said Mark Moskowitz, an analyst at Barclays.

The advent of cloud computing, which frees companies from having to invest heavily in their own infrastructure to store and manage data, has revolutionized IBM by undercutting demand for its servers and the high-margin consulting and support services that go with them.

IBM is vying for the cloud market, which is valued at $10.8 billion and accounted for more than 13% of the company's total revenue last year. But the company has put most of its efforts into so-called hybrid cloud services, which incorporate personal servers so that IBM can continue to provide customers with "middleware" and support. Middleware accounts for about 40% of IBM's profits, according to Moskovitz. But the business model puts IBM at a disadvantage when competing with rivals such as Amazon and Microsoft that are less focused on expensive "public cloud" services. "You don't get fired for using Amazon Web Services," said Steven Milunovich, an analyst at UBS , who was told by the company's chief information officer. "This is a new IBM."

IBM’s share of the cloud market is less than 10% by most estimates, and investors almost universally believe the business is unlikely to help turn around IBM’s finances. Optimists are pinning their hopes on IBM’s machine learning and artificial intelligence technologies, best represented in the public eye by its Watson computer system, the articulate device that has appeared on “Jeopardy!” and in countless commercials.

Earlier this year, Morgan Stanley analyst Katy Huberty raised her rating on IBM stock from neutral to buy, saying IBM is in a leading position in the AI ​​race because the analytical capabilities of Watson's computer system are likely to be applied to a wide range of fields, such as travel, finance and retail. Huberty said she is excited about the large amount of data IBM has managed to obtain recently, especially in the healthcare field. In February, IBM Watson Health acquired Truven Health Analytics for $2.6 billion.

IBM doesn't break out its AI financials, which can be puzzling for investors who want to know the numbers, Moskovitz said. But analysts say IBM's "strategic mission" business, which includes AI, as well as cloud technology, security and other projects, will account for more than half of the company's revenue by mid-2017. In 2015, the business had sales of $28.9 billion, up 17% from 2014. Competition in the field is heating up, with Google and Microsoft also pursuing AI ambitions, but Huberty believes that if IBM can get 25% of the market, AI will "easily make $50 billion for the company."

Of course, this is a iffy scenario, and many investors are not optimistic. Of the 26 analysts who follow IBM, only seven rate the stock a buy or strong buy. That’s unusually low in an atmosphere of optimism. Institutional investors, such as mutual funds and pension funds, have also chosen to abandon IBM’s stock, holding only 66% of the company’s shares, according to Morningstar, while technology companies such as Hewlett Packard Enterprise and Cisco Systems hold at least 82%. But if IBM eventually reverses its sales decline, those institutional investors will buy back into its stock, blowing up a huge bubble for those who are willing to invest in IBM now. (“Another reason not to be too optimistic,” Milunovich points out.)

Investors willing to take risks can buy this still-profitable company at a price-to-earnings ratio as low as 11, and earn a 3.4% dividend while they hold it (a rate far higher than the average for companies in the S&P 500). They also own IBM shares with a well-known company. Warren Buffett's Berkshire Hathaway, IBM's largest shareholder, has bought 12 million shares of IBM since the end of 2013, and now owns 81 million shares. Buffett bought nearly 200,000 shares in the quarter ended in March.

Of course, Buffett also admits that he may be wrong. Finally, I would like to give you a suggestion: If you can't afford to lose money, then don't buy IBM.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.