IBM’s Generative AI Business Is Small but Booming | The Motley Fool

International Business Machines (IBM -0.24%) 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.