IBM Inks $2 Billion Deal To Develop AI Hardware Center In NY

International Business Machines Corporation (NYSE:IBM) intends to develop an "AI Hardware Center" at Albany, NY-based SUNY Polytechnic Institute campus. Governor of New York, Andrew M. Cuomo, recently announced that IBM is allocating around $2 billion for the project.

The center is aimed at advancing research on artificial intelligence (AI) based research and development of computer chips.

Cuomo expects the development of the center in collaboration with New York State, to create new jobs and accelerate AI-driven processes on hardware development technologies including simulation, testing and prototyping.

The $2 billion investment includes in-kind and cash contribution of approximately $30 million to SUNY system, wherein SUNY is anticipated to contribute around $25 million, taking the total to $55 million.

Meanwhile, Empire State Development will rake in $300 million as capital grant spread over five years for the project.

Additionally, IBM is likely to extend its ongoing alliance with SUNY Poly for the Center for Semiconductor Research (“CSR”) (scheduled to conclude around end of 2021) to 2023.

IBM continues to invest in rapidly growing fields like hybrid cloud, artificial intelligence (AI), security and blockchain.

However, we may note that operating expenses declined 5.3% on a year-over-year basis in the fourth quarter of 2018. Management attributed the decline to realization of acquisition synergies and improving operational efficiencies.

Deal to Aid IBM Expand Presence in North America

IBM has been gaining notable ground in Europe in recent times including adoption of its solutions from the likes of Vodafone (LON:VOD), Meiji Yasuda Life, Juniper, Cegid, Novis, KMD, to mention a few. However, the new contract worth more than $2 billion is reportedly one of the prime commitments made by the company in the United States, of late.

Per a MarketsandMarkets report, the AI market is projected to reach $190.61 billion by 2025 from $21.46 billion in 2018, witnessing a CAGR of approximately 36.6% during 2018-2025. IBM is leaving no stone unturned to capitalize on the rapidly growing AI market. Notably, North America holds a major share of this market.

Moreover, the prospects of IBM have been enhanced with increased focus on research and development of AI-based chips spurred by dynamic improvement in machine learning (ML) and edge computing gaining steam

Notably, per AlliedMarketResearch data, AI chip market is envisioned to witness a CAGR of 45.4% between 2018 and 2025 to grow to $91.19 billion by 2025 from $4.51 billion valued in 2017.

In fact, in 2017, North America accounted for around two-fifth of total AI chip market revenues. The dominance of the region in market share can be attributed to increase in R&D of self-driving vehicles, growing clout of connected devices, robust technology advancements in healthcare and cybersecurity, among others.

Move in Sync with Current Tech Trends

We believe that IBM’s investment is in sync with the growing allegiance of technology companies like Intel (NASDAQ:INTC) , Micron (NASDAQ:MU) , NVIDIA (NASDAQ:NVDA), to mention a few, to benefit from the accelerated workloads of AI-driven chips.

In fact, at CES 2019, Intel announced that it is working with Facebook (NASDAQ:FB) and other partners to develop an AI-based inference chip, NNP-I (Nervana Neural Network Processor for Inference).

Further, Micron in the recent past has announced that it will spend $100 million in various AI companies, especially hardware and software startups working on AI. Moreover, Micron Foundation, the non-profit arm of Micron Technology, also announced that it will support universities and non-profit organizations in their research on AI) with a grant of $1 million.

To Conclude

IBM's strength in automation, cognitive and optimization capabilities enabling enterprises to run business processes efficiently in a secure infrastructure bodes well. However, rising competition from Amazon (NASDAQ:AMZN) Web Services (“AWS”) and Microsoft (NASDAQ:MSFT) Azure in the cloud domain is a headwind.

Zacks Rank

IBM currently carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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