IBM's Generative AI Business Is Small but Booming

International Business Machines (NYSE:IBM) has long been an AI innovator, but the iconic tech giant has historically struggled to turn AI into a bona fide business.

IBM's Watson AI system famously beat top-tier Jeopardy! champions in 2011, a feat that came more than a decade before OpenAI's world-changing ChatGPT. Attempts to parlay that accomplishment into revenue and profit, however, largely came up empty. Watson Health, IBM's high-profile play at using its Watson AI technology to transform the healthcare industry, was eventually sold off to a private equity firm.

A different strategy

In the age of generative AI, IBM is taking an approach that better meshes with its overall strategy. The company has repurposed the Watson name for its watsonx platform, which is aimed at enabling enterprise customers to train, deploy, and manage AI applications and models. Paired with its consulting business, IBM offers an easy way for large companies and organizations with strict requirements to adopt generative AI technology.

Consulting is IBM's not-so-secret weapon in the generative AI market. About three-quarters of all generative AI business booked so far has come from consulting signings, while the other quarter has come from software. IBM is successfully tapping into soaring demand for guidance and expertise related to generative AI technology with its consulting business.

Since IBM launched the watsonx platform roughly a year ago, the company has booked more than $2 billion worth of business. This is small on the scale of IBM. The company is expected to generate nearly $60 billion in revenue this year, and generative AI will make up just a small part of that total. But the growth rate is impressive.

In just a single quarter, IBM has doubled its cumulative generative AI bookings. This metric stood at "greater than $1 billion" at the end of the first quarter, and now it sits at "greater than $2 billion." The momentum behind IBM's generative AI offerings is building.

One area on the software side where IBM is having success is watsonx Code Assistant for Z. IBM's mainframe systems are critical to certain industries, but much of the code running on these systems is decades old and written in COBOL, an ancient programming language with a dwindling pool of developers. Code Assistant for Z takes COBOL code and transforms it into modern Java code, enabling customers to modernize mainframe applications with relative ease.

An enterprise AI leader

While the growth rate of generative AI bookings for IBM is bound to slow, the company's consulting-heavy strategy is clearly paying off. IBM is still seeing some weakness in discretionary spending from clients, with large, transformational projects that deliver significant cost savings or productivity gains being prioritized. Generative AI can certainly fit into that category as companies adopt the technology to make operations more efficient.

IBM isn't the most exciting AI stock. At best, generative AI could provide a small boost to the company's growth rate. However, as companies transition from racing to adopt AI no matter the costs to requiring that AI spending produces an acceptable rate of return, IBM's AI strategy looks poised to deliver for the tech giant for years to come.

Should you invest $1,000 in International Business Machines right now?

Before you buy stock in International Business Machines, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and International Business Machines wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $683,777!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of July 29, 2024

Timothy Green has positions in International Business Machines. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.