Thesis Summary
The combination of Watson, Industry-Specific Data, Industry expertise, and Hardware built for heavy-duty AI, makes for a strong castle. The virtuous feedback loop amongst these businesses could widen the Moat against competition.
Competitive Advantage: The Castle
- Core Competency? Data Analysis Solutions through AI, Cloud and Industry Expertise.
- Better or Cheaper Products? Potentially better, by infusing AI with better industry-specific data.
- Historical Profitability? Revenues down 3% since 2015. EBITDA down 20% over same timeframe.
Durability of Competitive Advantage: The Moat
- Competition? Heavy. Giants like Google, Microsoft and Amazon investing heavily in AI.
- Protection? End-to-End services model: AI, Data, Cloud, Consulting, Hardware offered seamlessly.
- Resiliency of Cash Flows? Have been volatile. But new business is more long-cycle.
Management Quality
- Strategy & Action? High marks for aligning company around AI. Capital Allocation questionable.
- Alignment of Incentives? Above Average. Variable comp. is a mix of Cash Flow metrics and stock.
- Financial Productivity? High ROE business – but inflated by Share Buybacks.
- Sustainable Free Cash Flow? About $10 billion a year. Translates to valuation of $218/share.
In the sections below, we expand upon each of these points. This was originally posted in April 2018.