If you were asked to invest in a company with declining revenue, collapsing earnings and a company that has pretty much abandoned next years earnings forecast, would you invest in it? No? What if I told that the board of directors has a solution to this problem – which is repeated attrition and buying its own stock. Still no? Welcome to the life of (and possibly the death of IBM?) one of the oldest and largest tech companies in the world – International Business Machines (IBM).
The Tech Sector
As someone working in the tech industry, I find IBM to be a dinosaur. They are stuck in the old ways and are too sluggish to move forward. And especially in an industry where things move fast, even if you stand still – you are considered moving backward. I have written in the past about companies dying and go through a life cycle just like individuals. Nothing really lasts forever. Could this be the beginning of the end of IBM?
Technologically, IBM is just resting on the old accolades. They have already sold their server and desktop business to Lenovo and now selling their chip business to Globalfoundaries (for which IBM is paying $1.5B to take it off its hands). They still lead in a few fields like mainframes/supercomputers and AI, but who knows how long that’ll last (Google and Microsoft have some pretty fantastic/smart teams in their AI divisions although the target market slightly different – but still look out for competition there).
The Death of IBM
This is a company that has its third quarter profits fall 99%!! And pretty much abandoned its 2015 earnings forecast. That is just unacceptable for a company with a heritage like IBM. And what is the response to that? Board is being asked to authorize more buybacks! Over the last few quarters, they have unveiled some pretty horrific numbers from declining revenues to razor thin margins and have resorted to financial engineering like buybacks to prop up their numbers. Buyback programs like IBM’s are the reason why I hate the buyback programs.
Keep in mind that IBM has the resources to turn things around – which could result in a great contrarian play. I for one would never invest in IBM under the current conditions.
All tech stocks in the DJIA have some rainy days ahead. The three tech components are Cisco Systems (CSCO), Intel Corp (INTC), International Business Machines (IBM). Cisco is facing headwinds from all sorts of places – such as dropping revenue from China and other overseas clients, forex conversion hits due to a strong dollar, competition from startups etc. Intel has also seen its fair share of problems having completely missed the boat on mobile chipsets and companies like Qualcomm Inc (QCOM) have a brighter future going forward. And so far IBM has seen one too many disappointing quarters. Last week, I also opened a small starter position in Apple Inc (AAPL). I am speculating here, but with the rumors of Apple getting introduced into the DJIA index after the stock split earlier this year, I think IBM is one that could get kicked out of the index.
Do you invest in IBM? What are your thoughts on the stock?
Full disclosure: Long AAPL, QCOM. My full list of holdings is available here.