I do not have shares in International Business Machines (IBM). I did not like that IBM has failed to compete against SaaS (Software-as-a-Service) leaders like Microsoft (NASDAQ:MSFT), Adobe (NASDAQ:ADBE), and Alphabet (GOOG, GOOGL). However, Gartner’s recognition of IBM as one of the early leaders in Managed Security Services compelled me to consider the stock for future inclusion in my long-term portfolio.
Second only to SecureWorks, Gartner identified IBM as a visionary leader in Managed Security Services. It may not be able to compete in SaaS against Microsoft and Alphabet, but it is now emerging as a key provider of Security-as-a-Service solutions.
SecureWorks is a subsidiary of Dell Corp. (NYSE:DVMT). IBM and Dell are therefore contesting the pole position in Managed Security Services.
Cloud-based managed security services or cybersecurity is a fast-growing industry. Zion Market Research expects the cybersecurity industry to be worth $181.77 billion by 2021. Providing cybersecurity could be IBM’s white knight savior. It could help reverse the negative annual revenue growth performance of the company.
As early as FY 2015, IBM Security already generated $2 billion in annual revenue. It is under the Cognitive Solutions segment. The Cognitive Solutions segment is IBM’s best-performing unit based on gross margins. Going forward, IBM Security is therefore part of Big Blue’s most important business segment.
IBM’s Cognitive Cybersecurity
Gartner recognized IBM as one of the visionaries in cybersecurity because of its large investment in Artificial Intelligence. IBM is now positioned as a leading provider of cognitive cybersecurity. Watson for Cyber Security was launched last February. This was after the beta testing done by 40 firms last December. IBM beta testers were apparently happy with Watson for Cyber Security.
IBM’s Watson is very valuable. The company got awarded 2,700 patents last year relating to cognitive computing, Artificial Intelligence, and cloud computing. United States Patent 9384450 is IBM’s new gem, it protects Watson’s cognitive computing ability.
The new Managed Security Services push combines IBM Watson’s cognitive abilities with the company’s QRadar Security Analytics Platform. This would assist the human security analysts of corporate Managed Security Operations Centers (SOC) to identify/neutralize threats faster.
In other words, IBM is using its flagship Artificial Intelligence (AI) product, Watson, as a differentiator for its Managed Security Services platform. From being just a Jeopardy! contestant, Watson can now help cybersecurity experts quickly identify, analyze, and neutralize ransomware, Trojan Horse programs, malware, and other computer viruses that hackers and government agencies love concocting/experimenting with.
The company’s masterplan is to use Watson’s cognitive or machine learning capability to build a human-like immune system for enterprise security. Just like how the human immune system learns how to automatically identify and neutralize viruses, bacteria, and cancer cells, Watson for Cyber Security will do the same against computer-disseminated unwanted intrusions/penetrations.
Artificial Intelligence As A Weapon Against Hackers
IBM’s Managed Security Service platform is going beyond the passive “moat & firewall” approach to protecting sensitive/private enterprise data. The company touts a for-rent security service that can grow stronger and smarter as time goes by. Cognitive cybersecurity is the future of Managed Security Services. Human cybersecurity experts can never match the compute/analytical power of the IBM Watson Supercomputer.
Watson could process information at 80 teraflops (trillion floating-point operations per second). It excels in curating, analyzing unstructured data. Due to the sophistication of hackers today, software security needs a tool to scour information out of unstructured data sources like blogs, social networks, forum articles, etc.
Cognitive cybersecurity through Watson’s machine learning capability will help security professionals extract insights from massive volumes of data quickly. As per the document provided to me by an IBM employee, companies now experience on average of 200,000 security events every day. Not even a team composed of 100 human cybersecurity experts can identify and analyze them all.
Watson for Cyber Security can help companies save critical time by accessing information available on structured and unstructured data to help human cybersecurity experts respond faster to threats like the WannaCry ransomware. Watson can dive into information-rich sources that no human can do as fast.
As per the document provided to me by IBM, customers of Watson for Cyber Security have detected security breaches 50x faster than through manual/human security analysis.
The potential of AI in security has also inspired Microsoft to buy Hexadite for $100 million. Hexadite is Microsoft’s answer to Watson for Cyber Security – they both use Artificial Intelligence to automate threat detection and elimination.
I am not authorized to share the full document provided to me by an IBM employee. Nevertheless, here’s a screenshot of the partial content of the document provided to me.
The Watson-powered cognitive cybersecurity platform could help IBM Security double up its annual revenue to $4 billion within the next three years. Such an accomplishment could inspire investors to take a more respectful look at Big Blue.
The huge investment in Artificial Intelligence was worth it. Watson is now the powerful engine behind IBM’s emergence as a leader in cognitive cybersecurity. Cognitive cybersecurity is the future of Managed Security Services. Without the gamble on Watson, Gartner would have not recognized IBM as a leader in Managed-Security-as-a-Service (MSaaS). There, I coined a new fancy tagline, MSaaS. If you don’t like it, how about IBM is now a leader in Cognitive Cyber Security-as-a-Service, CCSaaS?
I am considering adding IBM to my portfolio. I’m just waiting for the market to punish the stock next week after the company again reports less-than-expected revenue/EPS numbers. IBM’s revenue has fallen 20 quarters in a row. I feel no. 21 and no. 22 are going to fulfill that trend. I want a real cheap entry point for IBM. I expect the bears to deliver this opportunity after the company makes its earnings report on July 18.
Nevertheless, I still want to point out that IBM is now relatively undervalued compared to its peers. It is ripe for bottom fishing. The company has a very strong dividend and stock buyback history, and yet the market values it like a has-been, negative-growth dinosaur.
The AI-enhanced Relative Value Model of FundamentalSpeculation told me that stock deserves a fair value of $207.24. This number was derived by first finding the Cohort Fair Value of IBM, which is $187.45. The Cohort Fair Value was computed based on the valuation ratios of companies with similar business fundamentals to IBM.
FundamentalSpeculation’s computers then added some adjustments to the Cohort Fair Value of $187.45. The algorithmic adjustments are based on IBM’s sector peers’ (Technology and IT Services and Consulting) valuation ratios. This resulted in a relative fair value score of $207.24 for IBM.
If you still didn’t get it, here’s another chart of my FundamentalSpeculation.io account. It says IBM’s P/E, P/E, and EV/EBITDA valuation ratios are notably lower than the averages of its peers in the Technology sector and IT Services & Consulting industry.
I hope that discussing IBM’s early leadership in cognitive cybersecurity will inspire more retail and institutional investors to see the stock in a more optimistic light.
Disclosure: I am/we are long GOOG, MSFT, ADBE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.