Is IBM’s Watson Overhyped & Soon to Be Outdone?
#IBMWatson may be the first name that comes to mind when you think #artificialintelligence, ever since it beat out a human on the Jeopardy! quiz show back in 2011, but skepticism is mounting around whether the company will be the best — or most profitable — name in #AI as the market picks up traction. #IBMCorp. (NYSE: IBM) makes a big deal about Watson. In fact, it’s published over 200 press releases with Watson in the headline in the past five years and mentioned it at least 200 times in its prepared remarks on earnings reports since 2013, as well as investing more than $20 billion, according to Jefferies & Co. Inc. . The investment bank, however, believes the AI platform will struggle to keep up with competition, as the services component of AI deployments and the cost of doing business present problems for Watson adoption. (See IBM Watson Faces Tough Road – Analyst.) “Our checks suggest that while IBM offers one of the more mature cognitive computing platforms today, the hefty services component of many AI deployments will be a hindrance to adoption,” James Kisner, Jefferies senior vice president, IT hardware and communications infrastructure equities research, writes in a research note this week. “We also believe IBM appears outgunned in the war for AI talent and will likely see increasing competition. Finally, our analysis suggests that the returns on IBM’s investments aren’t likely to be above the cost of capital.” Jefferies acknowledges that Watson remains one of the most complete cognitive platforms available on the market today, but it sees it struggling to attract interest from companies that don’t want to endure the significant consulting work to gather and curate the data required to take advantage of it. (See IBM Leads $15M Funding Round for AI Programming Startup.) Other companies are also stepping up their AI recruitment efforts — Jefferies says that Amazon.com Inc. (Nasdaq: AMZN) has ten times more job listings than IBM. (See IBM: AI Needs More Than Just Technology.) What’s more, companies have more choices when it comes to APIs. IBM dropped its pricing for Watson Conversations by 70% back in October, which — in part — leads Jefferies to determine that IBM barely recoups its cost of capital from AI investments. Jefferies estimates Watson plus associated pull-through revenue will only contribute between 3% to 5% to consensus earnings per share in 2019. (See Element AI Raises $102M to Bring AI to All.) It sees competitors Nvidia Corp. (Nasdaq: NVDA), Pure Storage and, to a lesser degree, Mellanox Technologies Ltd. (Nasdaq: MLNX) gaining the most from both the uptick in AI adoption and in IBM’s struggles.