Back in March, International Business Machines (IBM +0.47%) and Salesforce (CRM 0.74%) announced a strategic partnership that would combine the power of both companies' artificial intelligence (AI) platforms. It was a landmark business move that could help accelerate the use of AI across every aspect of our lives, as well as benefit both companies. Yet since that announcement, the two stocks have been on diverging courses.
Data source: YCharts.
Watson & Einstein
IBM's Watson is a cognitive learning system, basically a computer that imitates the human brain in how it learns from and interacts with data. The adaptive ability of Watson lends itself to virtually any business task, and IBM has applied it to a wide array of industries from tax preparation to the management of elevators and escalators.
Image source: IBM.
The company is constantly pairing Watson up with new business clients. Speaking to the need for continuous work in this regard, IBM CFO Martin Schroeter had this to say during the first-quarter 2017 earnings call in April [transcript via Seeking Alpha]: "We've been very clear that to be successful with enterprise clients and to solve real problems, you need to bring together cognitive solutions on cloud platforms and create industry specific solutions. And so we've been focused on building a cognitive and cloud platform, and massing the best industry skills and capabilities, all while maintaining our focus on delivering higher value solutions."
This is where the new partnership with Salesforce and its Einstein AI platform fits in. Where Watson is designed to be an assistant for multiple areas of discipline, Einstein focuses specifically on delivering insight on customers and prospective customers to sales and service teams. The new cooperation is another feather in the hat of IBM, and opens up new software capabilities for users of Salesforce's suite of services.
The Salesforce advantage
IBM has been investing in new services, including Watson and other cognitive computing tools, with great success. During the first quarter, the company reported strong results across all of its growth strategies.
| Business Segment | Revenue Growth (YOY) |
|---|---|
| Cloud | 33% |
| Analytics | 6% |
| Mobile | 20% |
| Security | 9% |
Chart by author. Data source: IBM Q1 2017 earnings.
In spite of those growth initiatives, IBM finds itself being held back by a legacy business that is in decline. Overall revenue was down 2.8% during the quarter, and profits were down 11%.
By contrast, Salesforce's business is solely focused on customer relationship management (CRM) and related software. Overall revenue rose 25% last quarter, driven by the company's practice of heavy investment in growth. Profits are thin, but revenue has been increasing double digits for years.
Data source: YCharts.
Salesforce has been able to grow its business through numerous acquisitions and internal developments, and AI represents its next big push as it helps users of its software be more efficient and gain insight into customer thinking and behavior.
A win-win situation, but one wins bigger
IBM's venture into AI has been a success, and Watson is becoming a well-known name. However, with Watson and other investments only offsetting losses elsewhere, it looks like IBM needs Salesforce more than Salesforce needs IBM.
Salesforce also needs ways to keep its impressive growth machine churning, but it has the benefit of being a smaller and newer company. While IBM tries to reimagine itself in a world that has drastically changed from when it started, Salesforce is eating the lunch of other software companies.
The winner in the AI for business insight battle? Salesforce.
