Leading tech companies appear to be united in a belief that artificial intelligence (AI) is on track to change the world, and IBM (NYSE: IBM) has been making some big bets to ensure that it maintains a leadership position in the space. Most recently, the company announced a 10-year partnership with the Massachusetts Institute of Technology (MIT) that will see it invest $240 million in a new lab that will research and develop AI technology and study its potential applications.
Is the company's latest investment in the future of machine learning something that investors should get excited about?
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Background on the IBM-MIT Watson AI lab
The newly formed IBM-MIT Watson lab is set to assemble a team of more than 100 scientists, professors, and students in order to develop AI and explore applications for the technology in industries including healthcare and cyber security. The newly formed lab will be focused on four key areas of research: algorithms, the use of AI for quantum computing, applying machine learning to various industries, and exploring how the technology can be used to create shared prosperity for a range of peoples, nations, and enterprises.
Here's a quote from John Kelly, IBM's senior vice president of cognitive solutions and research, on the future of AI and the potential impact of the company's new partnership with MIT:
The deal for a new AI lab comes on the heels of a 2016 multi-year partnership between IBM and MIT's Department of Brain and Cognitive Sciences to develop machine vision technology and a $50 million investment that the company made in a research partnership with Harvard and MIT to study AI applications for genome mapping. Building out its AI capabilities is the type of undertaking that has the potential to create benefits across multiple layers of the company's business, and IBM naturally plans to use technologies developed within the MIT lab for commercial applications.
As sales for the company's legacy hardware and software offerings have declined, IBM is shifting to business categories including social, mobile, analytics, and cloud -- a collection of ventures that it dubs "strategic imperatives." The company has already integrated machine learning systems into many of its growth businesses, and AI looks to be integral the key strand that ties its strategic imperatives unit together. Over the trailing 12-month period, the segment's sales grew 11% to account for 43% of revenue; however, the associated businesses will likely need to produce accelerated growth in order to offset declines in other areas of the company.
Will AI initiatives deliver wins for investors?
Some of the skepticism that has surrounded IBM in recent years and contributed to its lagging stock performance is understandable. The company's sales are at their lowest point in more than 15 years, and transitioning to new markets tends to be a difficult and expensive process in the technology sector. That said, the company also has a commendable track record of innovation. It's been one of the earliest movers in the AI space, with a more than 20-year history working in the field.
If IBM manages to deliver substantial advancements in AI over the long term, it will create dynamic advantages for the company's cloud platform and services and should help it win enterprise customers who are looking for ways to securely generate insights from their vast troves of data. IBM sees the cognitive computing market as being worth $2 trillion in 2025 as businesses look to analytics systems for assistance with data management and decision making. That's substantially more than the $1.2 trillion it expects will be spent on information technology categories including data centers, process automation, infrastructure, and enterprise resource planning. If that projection is correct, and IBM can maintain or increase its share of the broader information technology market, the company is looking at a huge growth opportunity that should more than offset declines for its legacy products.
It's impossible to state with certainty whether IBM's artificial intelligence ventures will produce the success that the company is aiming for. On the other hand, counting on AI to be one of the most important technologies on the horizon is a smart bet, and it's encouraging that IBM is making moves and investments to remain at the forefront of machine learning.
The tech giant has traveled a bumpy road in recent years, but trading at less than 11 times forward earnings estimates and packing a roughly 4.2% dividend yield, it's worth getting on board with the company's turnaround story and vision for the future.
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