3 IBM Moonshots Shareholders Should Know About

By Billy Duberstein Markets Fool.com

Who knew that a company as big and well-known as IBM (NYSE: IBM) could become a battleground stock? In the span of a day, two sell-side analysts gave two starkly different takes on the company. Jefferies analyst James Kisner reiterated his underperform rating on the company, with a price target of $125, while Drexel Hamilton analyst Brian White raised his target to an outperform and a whopping $215. The stock currently trades near the midpoint of the two, at $180 per share and 14.5 times earnings. This seems to be par for the course for IBM, with investing greats such as Warren Buffett and Stanley Druckenmiller taking similarly divergent stances, with Buffett long and Druckenmiller short.

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The divergence seems to be on the topic of IBM's "moonshot" bets. Most know the company has had declining revenues for roughly 19 straight quarters, though some of the decline came from the the company divesting unprofitable business units, such as semiconductor manufacturing. In addition, even its existing cash cows are declining as well, as the company was late to the cloud-computing game, now dominated by Amazon.com and Microsoft (NASDAQ: MSFT). This is the crux of the bears' case.

IBM is not standing still, however; it has been aggressively investing in new technologies and buying companies in "bolt-on" acquisitions around these new bets. One need to look no further than the recent numbers from the U.S. Patent and Trademark Office, which show that IBM was granted the most patents in the U.S. in 2016...for the 24th year in a row. It's clear that pioneering new technologies is part of the company's DNA, and bulls have faith that some, or maybe all, of these new bets could lead to big payoffs in the future. Three big bets to watch out for are Watson, blockchain, and quantum computing.

Image source: Getty Images.

Watson

One could say that Watson is the most mature of the big bets, though it is difficult to get a grasp on how much revenue the segment generates. The unit is grouped within the "strategic imperatives" unit of the company, which exceeded $32 billion and made up more than 40% of the company's revenue in 2016. Such a contribution to revenues was ahead of schedule, according to CEO Ginni Rometty.

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Many first got to know Watson in 2011, when it beat a couple of us "humans" on Jeopardy! in 2011, showing America that artificial intelligence was not just the stuff of Stanley Kubrick movies anymore.

Since then, IBM has developed Watson by purchasing companies such as Truven Health Analytics for healthcare, Promontory Financial Group for financial services regulation, and The Weather Company for (you guessed it) weather, specifically for applications for the Internet of Things. With these acquisitions, the company claims, it is obtaining valuable industry data that is not public, plus the best practices and expertise that come from the employees of these companies.

IBM has a plan to differentiate Watson from all of the other AI platforms out there. Rometty explained that 80% of all data is non-public , which means that those who own the data -- the companies that collect it -- value it highly. IBM is promising these companies that in exchange for feeding their data into Watson, IBM will let them keep their insights private.

According to Rometty at Monday's investor presentation, Watson will touch a billion people by the end of this year. She also threw out a $2 trillion number -- that's with a "t" -- as the market for enhanced decision-making via machine learning. There have certainly been a lot of Watson-related headlines these days, with new partnerships with H&R Block (NYSE: HRB), which is using financial-industry data for its clients; salesforce.com (NYSE: CRM), which noted that its partnership was to make partial use of Watson's weather-related insights for insurance clients; and the Health Transformation Alliance, a nonprofit alliance of twenty large American employers, which will use Watson to help bring down the consortium's healthcare costs.

Blockchain

While many had Bitcoin fever a few years ago when the digital currency made waves on the internet, IBM saw potential in its underlying technology, called the blockchain.

As featured in a recent New York Times article, IBM is working with Wal-Mart (NYSE: WMT), Danish company Maersk (NASDAQOTH: AMKBF), and almost four hundred other companies in testing out this implementation of the technology.

Blockchain uses high-powered computers and advanced math to note transactions between two parties, and does so in a way that makes alteration of the records after the fact impossible. As one can imagine, IBM is looking to implement this for financial institutions in recording trades. But companies that ship products around the world like Wal-Mart and Maersk can benefit, too. According to the article, when these companies ship containers, each container may require up to thirty approvals from various inspectors and customs officials. The system is also prone to fraud. A successful implementation of blockchain technology could help with that, leading to large savings for these shipping companies.

One thing to watch out for, says the article, is that some large companies are reluctant to make IBM Blockchain the de facto standard, as it might lock them into IBM's ecosystem. JPMorgan Chase (NYSE: JPM), for instance, is working with Microsoft on its own blockchain technology called Ethereum.

Quantum computing

Perhaps the most far-out moonshot -- in terms of both time and coolness -- is IBM's foray into quantum computing. Quantum computers can process information that regular computers can't. Whereas the most powerful computers today can come up with solutions based on currently available data (a feat in itself), quantum computers can theoretically solve problems for which there are no patterns in the data, and the possibilities to explore are too numerous for even the fastest "regular computers."

Whoa.

How is this possible? According to futurism.com:

This increase in speed is made possible through the use of quantum bits (or qubits) instead of the binary bits that current computers employ. Qubits rely on the quantum phenomenon of superposition, which allows them to be 0s or 1s at the same time. This ability to exist in multiple states at once enables qubits to process information more quickly.

Everybody got that? Me neither. In fact, even IBM doesn't have all the answers. That is why it is opening up a project called IBM Q, which will enlist anyone interested in the field to contribute code and research, as open source.

The company opened up a 5-qubit system in May, but one day hopes to build the world's first quantum computer with 50 qubits, which will help solve problems in medicine, material science, and finance. What's even more exciting is that, according to IBM vice president of science and solutions Dario Gil, "no one is entirely sure of the full breadth of what a universal quantum computer is capable of."

Apparently, the same goes for analysts and investors when assessing Big Blue.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors; LinkedIn is owned by Microsoft. Billy Duberstein owns shares of Amazon, IBM, and Microsoft. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Salesforce.com. The Motley Fool has a disclosure policy.