As businesses weave artificial intelligence into their business structures, international business machines claim to be re-related to investors. But that still has a lot to prove.
Without much fanfare, CEO Arvind Krishna has built up a $6 billion booking around the generation AI. This mainly consists of consulting contracts for companies looking to leverage technology. IBM’s software business is also growing, and has been more concentrated since 2021’s spinoff of IT outsourcing operations called Kyndryl.
It all leads to a company that has done better than it has been for a while, even if Gangbusters is not doing anything at all. Former IBM CEO Lou Gerstner wrote a book in 2002 about looking back at American business computing icons in the 1990s. Now there is an argument that Krishna has an IBM close to dance as anyone.
But many years after a perennial delay, stocks are now already priced in growth conversions. It set IBM up for the disappointment that attacked on Thursday, despite reporting decent income.
Even after that sharp decline, IBM is trading at about 21 times the advance revenue, compared to its 10-year average, just 12 times. This is actually a premium for places where AI heavyweights like NVIDIA, Google’s parent alphabet, Microsoft and others trade, and IBM hasn’t won yet.
Since becoming CEO in 2020, Krishna has been working to make IBM a facilitator of corporate technological transformation, dialing back to the practice of piloting corporate customers only to IBM products and services.
The shift is the $34 billion acquisition of the giant Red Hat of the company’s open source software, a deal that Krishna was deeply involved before taking the reins.
Krishna had a good understanding that many companies wanted some of their own hardware and setup information technology that they rented from large cloud computing companies like Microsoft and Amazon. IBM was centrally located in a red cap and developed and sold software to allow companies to manage such setups. Since IBM bought it, Red Hat’s revenue has nearly doubled.
This makes IBM sound more like a growth company than it has been in years. However, this week’s IBM results raised concerns about the health of the software business. JP Morgan analysts said they hadn’t met expectations in the first quarter, stripping them of the effects of the shift in currency valuation. And then there was an even bigger cloud hanging from the cyclical consulting business, which fell 2% in the quarter.
Much of IBM’s consulting work, which accounted for almost a third of the company’s $62.8 billion revenue last year, has little to do with AI. And ironically, for IBM, the prospect of AI shaking how companies work has led companies to postpone large IT projects. This means there is less consulting help overall.
On top of that, it is difficult to get very excited about the consulting business that is hoping that Morningstar analysts will grow at around 4% per year in the coming years, as they stack more uncertain economic outlooks that could dampen corporate spending.
Corporate AI also has a wide range of issues. The company is still in the experimental stage, and it is unclear whether or not it will require IBM’s handheld as technology matures. S&P Global Market Intelligence Analyst William Fellows compared today’s AI to an inefficient, fuel-hungered engine. Businesses are currently struggling with spending. Adventure capital firm Menlo Ventures estimates it spent $13.8 billion on AI last year, but a more efficient future could deny many of today’s opportunities.
The worry is that IBM has few records of taking advantage of the big technology shift. Just as Amazon’s AWS and Microsoft’s Azure became dominant in the industry, it didn’t make any major intrusions into cloud computing. They also were unable to convert past AI successes such as “Jeopardy!” I played Watson, or Deep Blue in Chessplay to thriving business. That Watson Health AI initiative was short.
Furthermore, IBM does not have the products that can be used to deepen customer relationships first built with AI consulting, such as Microsoft’s corporate productivity software and cloud computing operations. This limits the scope for extracting more revenue from AI opportunities.
Krishna certainly brought some pep back to the company stage that many analysts and investors had amortized just a few years ago. But if IBM was dancing towards AI’s prosperity on a straight line, it’s easy to mess up the cyclical pressure.
Write to asa fitch at asa.fitch@wsj.com
