International Business Machines Corp.'s Best Business Segment So Far In 2016

By Markets Fool.com

The burgeoning cloud market and the associated opportunities it presents for data center providers, infrastructure, and platform solutions is undeniable. Toss in the fact that much of the nearly limitless data derived from the budding Internet of Things market will be housed in cloud data centers, and it's no wonder tech behemoths like IBM (NYSE: IBM) and one of its primary competitors,Microsoft (NASDAQ: MSFT), have gone all in.

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As successful as IBM has been in growing its cloud business as part of CEO Ginni Rometty's strategic imperatives initiative (an argument could easily be made that cloud sales have been IBM's best business segment this year) it's the up-and-coming cognitive computing suite of solutions that bears watching. Why? Because the immediate opportunity lies in cloud-related revenue, but the most upside in the coming months and years lies with the data itself.

Image source: IBM.

The future begins now

In some respects, it's difficult to make distinctions between IBM's -- and Microsoft's, for that matter -- cloud sales and related cognitive computing business because so much of its data analytics and Watson-related machine learning solutions overlap cloud sales. As a unit, cognitive computing is IBM's largest, generating $4.68 billion in Q2, up 4% year over year.

Cloud sales in their entirety are now tracking at an annual run rate of $11.6 billion, which puts IBM in rarefied air with the likes of Microsoft and its $12.1 billion plus the past year. More telling as it relates to cognitive computing results is that IBM's cloud-as-a-service, where a portion of cognitive computing sales live,now boasts $6.7 billion in sales over the past year, which is up 50% compared to the prior 12-month period.

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If IBM's overall strategic imperative growth is any indication -- and it likely is given the multiple Watson-related wins announced so far in 2016 -- IBM is well on its way to leading the data analytics and machine learning market wars, and there's a lot at stake.

Big and getting bigger

According to one research firm, big data -- which is defined as the unprecedented, and still growing, sheer volume of information amassed in today's connected world -- along with analytics, drove $122 billion in revenue in 2015. That's an already impressive market opportunity for IBM and its industry-leading cognitive computing capabilities, and it gets even better. In just three years, that same big data and analytics market is expected to climb to more than $187 billion.

Naturally, a market the size of data and analytics invites big hitters to the party including Microsoft, among a host of others. However, much of Microsoft's early work in AI is designed to assist its software users with things like directions to a restaurant or an assistant, which was recently enhanced with the acquisition of AI-based scheduling provider Genee.

On the other hand, IBM is focused on providing its business customers with comprehensive AI data analytics. In addition to laying a healthy foundation for long-term growth of its cognitive computing group, IBM is already enjoying wins thanks in part to its emphasis on industry-specific sales. Rometty cited Watson Health, among other results "differentiated by industry," as a key component behind its 12% jump in combined strategic imperative sales of $8.3 billion in Q2. That equates to 41% of IBM's $20.2 billion in total revenue last quarter.

IBM is successfully transforming itself into a cloud leader, and with its stock price up about 17% year to date, investors are enjoying the change. That would certainly make IBM's cloud sales a sound choice for its best business segment in 2016. But as the world becomes increasingly digitized and data proves to be king, businesses will demand more than a place to house their information; they'll want comprehensive analysis that returns actionable results quickly and accurately.

IBM's cognitive computing segment is already leading the charge in the fast-growing market, which has it ideally positioned in these still relatively early stages to dominate its competition in the months and years ahead.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.