International Business Machine (NYSE:IBM) shares have been struggling again this year as the growing investor focus on growth hasn’t benefited the company and its defensive portfolio.
Still, IBM has been pushing hard to re-accelerate top-line growth. In addition to M&A deals that the legacy IT company has completed, IBM has also been pushing hard on the artificial intelligence (AI) front.
New Products to Convince a New Type of Investor
AI has been the major Wall Street story so far in 2023. Shares in large companies like Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), and Oracle (NYSE:ORCL) have all surged in recent months as investors scramble to increase their exposure to generative AI technology. While IBM isn’t perceived as a direct AI beneficiary, the company launched several tools and initiatives to gain traction on this front.
Among other initiatives, it has been reported that IBM has partnered with the All England Club to offer AI-generated audio commentary and captions for Wimbledon matches. Tennis fans will be able to witness history this July as the AI-generated commentary will be available for matches on the Wimbledon app and website.
“The AI and data platform that IBM is using to create unique fan experiences for Wimbledon is the same technology that we're using to drive business transformation with clients across all sectors and industries,” said Jonathan Adashek, Senior Vice President of Marketing and Communications for IBM.
Such commentary will be available thanks to IBM’s watsonx, an enterprise-ready AI and data platform. IBM’s AI-focusesd platform is based on three key pillars: Watsonx.ai – a studio for new Foundation Models (FMs), generative AI and machine learning (ML); watsonx.data – which is focused on the data; and watsonx.governance – which allows customers to build responsible, transparent, and explainable AI workflows.
IBM’s Watson platform has also been leveraged to boost the company’s partnership with Adobe (NASDAQ:ADBE). It was announced recently that two tech companies will further expand their partnership with a renewed focus on AI.
Under the terms of a new partnership, IBM Consulting is launching a new portfolio of Adobe consulting services, focused on the generative AI landscape. On the other hand, Adobe’s customers will also gain access to IBM Consulting experts, including those focused on AI, ML, and data analysis.
"We're seeing incredible momentum in AI adoption as more brands turn to generative AI to create seamless and highly personalized customer experiences to drive growth and improve productivity," said Matt Candy, global managing partner, IBM iX Customer & Experience Transformation, IBM Consulting.
The company’s increasing focus on generative AI doesn’t come as a surprise. CEO Arvind Krishna said earlier this year that the company is interested in replacing thousands of jobs with AI technology.
"I could easily see 30 percent of that getting replaced by AI and automation over a five-year period," Krishna told Bloomberg.
M&A Deals to Reaccelerate Growth
After struggling for over a decade to have a more prominent role in the tech revolution, IBM announced in 2019 it will be spending as much as $34 billion to acquire Red Hat, one of the world’s leading providers of enterprise open source software solutions. With the RedHat acquisition, IBM has been interested in pursuing a larger hybrid cloud opportunity.
However, nearly 4 years after the acquisition was closed in the summer of 2019, IBM stock price is actually trading a couple of percent lower. Shares hit a new multi-year high in December 2022 but have since retreated as investors reshuffle their portfolios to gain more exposure to growth.
This is one of the reasons why IBM is reportedly trying to acquire software company Apptio for around $5 billion, according to the Wall Street Journal. The business owned by the private equity firm Vista Equity Partners, which acquired it for about $2 billion in 2019, is focused on solutions that help its users to track software and services costs. Bank of America (NYSE:BAC) is listed as one of Apptio’s largest clients.
The Apptio deal is another step in the transformation process that IBM is undertaking. In addition to the massive RedHat acquisition, IBM spun off several businesses, including Kyndryl Holdings. The company is also reportedly mulling the sale of its weather business, which includes the prominent weather.com app.
The M&A deals are aimed at accelerating growth and making the company’s portfolio more appealing to a new type of investor. Two months ago, IBM reported quarterly sales of $14.3 billion, up modestly from the same period a year ago. Its software revenue rose 2.6% to $5.9 billion, better than the estimate of $5.76 billion. Growth in the software business segment was one of the key highlights of the Q1 earnings report.
Like others, IBM is also suffering from the broader economic slowdown. The company’s second-largest business unit – Consulting – saw its revenue jump 2.8% to $4.96 billion. On a more negative note, IBM generated $1.34 billion in free cash flow, a big miss compared to the expected $2.18 billion.
Despite the FCF miss, the company still reaffirmed its full-year FCF guidance of $10.5 billion. Full-year revenue is also maintained at +3-5%. Krishna’s comments in the earnings PR showcase the vision he has for IBM.
“Our first quarter results demonstrate that clients continue turning to IBM for our unique combination of an open hybrid cloud platform, enterprise-focused AI, and business expertise to unlock productivity and drive efficiency in their operations,” he said.
IBM is due to report its FQ2 results on July 19.
Summary
The plan is simple. IBM is seeking to become a leaner and more growth-focused company, offering more than just value and a defensively-originated portfolio. In a couple of years, IBM shareholders would love to see a new type of company that is fully leveraging hybrid-cloud and artificial intelligence opportunities.
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Neither the author, Shane Neagle, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
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