IBM's Watson -- a Smartphone Assistant To Put Siri to Shame?

By BA McKenna - September 15, 2012 | Tickers: AAPL, BRK-A, IBM, NUAN | 0 Comments

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If IBM (NYSE: IBM) has its way, Sherlock Holmes will be far from the only one with a bright and devoted assistant named Watson. Holmes is sure to be envious as IBM's "Watsons" are infinitely smarter than his -- and they don’t require sleep, so they’re ready to serve around the clock. 

Watson falls within IBM's business analytics division. Business analytics has a fast-growing component -- big data analytics, or "Big Data" -- which we'll get to. 

Brilliance, My Dear Watson, Brilliance

Watson, an artificial intelligence computer system, is capable of "thinking" and answering questions posed in natural language, thanks to IBM's DeepQA software. It's best known for trouncing Jeopardy’s two greatest champions of all time in 2011. It was marketing brilliance to choose Jeopardy as a venue in which to showcase Watson's abilities. Almost 10 million American households tuned in to watch the first night of the battle, and nearly as many tuned in on ensuing nights. 

The day after Watson's triumph, IBM announced its plan to apply Watson's analytical prowess to providing healthcare solutions. It said Dr. Watson -- as the healthcare-focused version has been dubbed -- would be an invaluable physicians assistant by helping doctors consider a complex mix of patient data, providing a list of possible diagnoses and ranking potential treatments. 

lBM was also on the receiving end of numerous inquiries after the show from entities of all types wanting to "hire" Watson. Big Blue is already pulling in some green on Watson --it's analyzing data for financial companies (such as Citigroup) and health care organizations (WellPoint).  

Researchers are now working to turn the big-brained computer into an energy-efficient assistant, dubbed Watson 2.0. Yes, like Apple's (NASDAQ: AAPL) Siri or Google's new "Now," but supercharged and for businesses, not consumers. IBM plans to give 2.0 additional senses, and has been working with Nuance Communications (NASDAQ: NUAN) to provide voice recognition. Nuance is the leader in voice recognition, and also teamed with Apple to develop Siri. 

There's nothing definitively out as to whether Watson 2.0 will be an app that can run on various smartphones and/or tablets, or if IBM will give 2.0 a proprietary 'body.' Apple's iPads have significant market penetration in general, and are increasingly being used in healthcare settings by doctors and nurses to take patient histories, among other things. So I think the smart move would be to make Watson 2.0 an app that works seemlessly on the iPad. Healthcare (and other industry) workers will not want to carry around two devices.

I'd like a Watson! As it's a product for businesses, it will no doubt be cost-prohibitive for (most) individuals, but let's take a look at a couple things it will easily be able to do...

"Pull up IBM's Financial & Stock Stats, and Give an Opinion, Watson."

Sources: Yahoo! Finance & Morningstar

"What is IBM's Revenue Makeup by Segment, Watson?"

IBM is nicely diversified -- 57% of 2Q revenue came from its consulting services, and 41% from product (software and hardware) sales. Total revenue was $25.8 billion. IBM is relatively unique in that it can provide integrated solutions -- software, hardware and services.

"What Segments are Most Profitable?"

Software is, by far, the most profitable. This is why IBM has been focused on growing this segment both organically and by acquisition. It has spent $14 billion on acquisitions to grow its analytics business (which heavily falls under Software, as well as Services) since 2005.

IBM was traditionally a hardware company, and has done a great job reinventing itself as a force in software and services. It saw the "hardware -- especially PCs -- is getting commoditized" writing on the wall, divested itself of its PC and some other hardware businesses, and has focused on growing the higher-margin segments.

"What are IBM's Growth Engines, Watson?" 

• Business analytics -- revenue up 13% in first half 2012.
• Smarter Planet -- revenue up over 20% in first half.
• Cloud -- revenue up about 100% in first half.

"How does Big Blue look in the Big Data space? And Big Data's market size, growth potential, main players?"

There are a wide range of definitions of Big Data, so stated market sizes vary considerably. Regardless, there are two consensuses -- IBM is a major force and significant growth is forecast for Big Data.

Here's part of IDC's definition: "'Big Data' refers to data sets whose volume, variety, velocity and complexity make it impossible for current databases and architectures to store and manage."

According to Wikibon's detailed 2012 Big Data study, IBM ranked #1 in 2011 in Big Data revenue, and a 58% compound annual growth rate (CAGR) is forecast for Big Data over the 5-year period to 2017. 

As for the broader business analytics category, IDC estimates it will be a $120 billion market by 2015. IBM anticipates $16 billion in business analytics revenue in 2015.

Big Growth in Big Data Forecast... 

Wikibon

Big Techs have a nice chunk of market share, but the market is very fragmented at this point...

Data directly from Wikibon or calculated from Wikibon data

"Is there qualitative info likely providing support for IBM being a 'buy,' Watson?"

Yes. Warren Buffett's Berkshire Hathaway (NYSE: BRK-A) owns 64,395,700 shares (a 5.36% stake) of IBM, worth $12.85 billion, as of Sept. 7. Notably, Buffett only began loading up on the stock in 2011; he's also done nibbling in 2012. Given he historically has steered clear of tech stocks, we can assume he likely felt especially strongly about IBM. 

"How's IBM performed over the 5-year period relative to a couple other big techs in the Big Data space, Accenture (a competitor in consulting end), and the S&P 500?"

IBM's up almost 80%. It's been a bit of a sleeper, quietly rising, while others have hogged the spotlight. While past performance is not indicative of future performance, it does often show a company can execute. (HP and Dell, not shown, are each down approx. 60%.)

IBM data by YCharts

"A closing Foolish thought, Watson?"

IBM stock looks like a potentially solid long-term buy and hold. Like a quintessential Buffet stock, it's not going to be a multi-bagger within a few years, but has the potential to be a steady grower. 

And like any fast-growing market in which huge companies such as IBM have a solid foothold, there is likely to be consolidation in Big Data with some of the smaller and most innovative pure plays being bought out by the large techs. Shareholders in the 'right' small companies could see sizable gains. 

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