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Why 2014 Will Be a Crucial Year in IBM's History

Stocks in this article: IBMHPQMSFT

NEW YORK (TheStreet) -- Fueled by cloud, big data, and Watson, 2014 will prove an important 12 months in IBM's (IBM) 103-year history.  From its early days manufacturing punch cards, cheese slicers and grocery scales, IBM grew into a twentieth-century tech behemoth, and it continues to change shape.

The last few months have been particularly busy for the Armonk, N.Y.-based firm, marked by major M&A, billion-dollar investments in supercomputer and cloud technology, as well as plans to rebalance the tech giant's workforce.

Stuart Williams, vice president of Technology Business Research, described 2014 as a pivotal year for IBM in a note released this week.

"At its core, IBM is an information management company, not a technology company," he wrote. "By shifting its focus to a service-oriented customer engagement strategy, automating its data centers and slimming its hardware business, IBM seeks to shed low-profit, low-differentiation businesses and build a more agile and profitable company based on offering flexible, 'IBM any way you want it' information management solutions."

Keen to shift its focus away from hardware to higher-margin areas such as software and services, IBM kicked 2014 off with an investment of more than $1 billion in its Watson supercomputer group, focused on R&D and is bringing cloud-based applications and services to market. Watson forms part of IBM's big push into 'cognitive computing', where computers can learn and interact with people in a natural fashion.

Shortly after ramping up its Watson strategy, IBM announced the Group's first investment to support start-ups and VC-backed businesses that are building cognitive apps in the Watson Developer Cloud.

Further evidence of IBM's metamorphosis continued in late January, when it clinched a $2.3 billion deal to sell its x86 server business to Chinese tech heavyweight Lenovo, echoing the sale of its PC business to the Beijing-based firm in 2005.

Last month, IBM announced a $1 billion-plus investment in Platform-as-a-Service (Paas), bolstering the cloud credentials of its WebSphere middleware, and unveiling 'BlueMix', an open beta for developers which combines IBM's software with third-party and open technologies.

"This is turning into a watershed year for IBM, as the company sheds its x86 server business, opens its Power platform for licensing, launches an expanded 'Cognitive Computing' business led by its groundbreaking Watson platform, and unveils a new 'IBM as a Service' strategy," wrote Williams. "This transformation dramatically changes the way IBM engages with its customers, and it will shift IBM's ecosystem and force competitors to adapt, adopt and improve."

JP Morgan analyst Mark Moskowitz also believes that Watson gives IBM a head start on its competitors, which include HP (HPQ) and Microsoft (MSFT).

"Currently, there are no direct competitive offerings to Watson, positioning IBM to be a first-mover in monetizing cognitive computing and related services," he wrote, in a note released this week. "With Watson, the customer does not procure any hardware from IBM but instead pays for data analytics run as part of a cloud-based service."

Moskowitz, who has a "neutral" rating on IBM, estimates that Watson could contribute $2 billion to the company's annual revenue by 2017.

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