https://www.barrons.com/articles/ibm-stock-gain-earnings-51579733460
IBM stock had a nice day Wednesday, rallying more than 3% after the company posted better-than-expected fourth-quarter results. Earnings beat Street estimates by two cents a share, and revenue was up 0.1% year over year—not much, but growth nonetheless. For the year to date, IBM shares have rallied a solid 7.4%.
What makes IBM’s one-day gain so striking is that it exceeds the stock’s performance for the entire previous decade. The stock rose $4.83 on Wednesday. On December 31, 2009, the stock closed at $130.90. Ten years later, on December 31, 2019, it closed at $134.04. That means over the 10 years ended December 31, it rose $3.14, a 10-year gain of just over 2%. In the same 10-year period, the S&P 500 rose 190%—and tech stocks rallied 300%.
Steve Milunovich, tech strategist at Wolfe Research, took a look at IBM shares (ticker: IBM) in a research note Wednesday morning and advised investors to put the fourth-quarter performance into perspective. “IBM is in decline,” he writes. “Surveys show it losing share of IT spending.” He points out that in January 2013, IBM and Microsoft (MSFT) had the same market valuation. Ten years later, Microsoft’s valuation is 10 times higher than IBM’s.
The divergence says more about Microsoft than it does about IBM, Milunovich said in an interview Wednesday. After all, there are few examples of tech giants retaining their dominance through generations of technological change. Nonetheless, he writes, investors should ask the question, “Can anything be done to alleviate or reverse Big Blue’s fall?”
IBM shares have fallen about 20% since the company announced Ginni Rometty’s ascension to CEO in late 2011. (She actually took over in 2012.) Milunovich notes that her focus as IBM’s leader has been the rollout of the company’s cognitive computing and cloud platform strategy. But he says that “Watson’s AI capabilities were oversold, and IBM didn’t establish a leading public cloud position,” leaving an opening for the likes of Amazon (AMZN) Web Services, Microsoft Azure, and Alphabet’s (GOOGL) Google Cloud.
Milunovich writes that IBM has focused on “Cloud Chapter 2,” driving the transformation of the 80% of enterprise work loads that remain on premise to cloud infrastructure. IBM’s $34 billion acquisition of open-sourcing computing giant Red Hat is a key part of the company’s bet on the trend. Milunovich reports, however, that his industry contacts “doubt Red Hat will much change IBM’s impact...they say the hyperscalers’ momentum is strong, IBM’s cloud services offering is undistinguished, and its brand is suffering.”
IBM declined to comment.
So what needs to happen? “A combination of management and structural change likely is required,” Milunovich writes. Rometty, 62, has already stayed in her role beyond the age at which her two predecessors stepped down—both Lou Gerstner and Sam Palmisano retired at age 60. Milunovich speculates that her eventual successor could be Martin Schroeter, senior vice president of IBM Global Markets, and a former IBM CFO who has been with the company since 1992. Another option: Red Hat CEO James Whitehurst—or maybe the two in combination.
Milunovich notes activist investors haven’t previously taken on IBM. But he contends “that could change as potential spinoff/asset sales are more closely examined,” citing the company’s services arms as the most likely target. Keep in mind that IBM has a long history of reinvention—over the years, the company has unloaded businesses in disk drives, printers, laptops, desktop PCs and microprocessors. (And typewriters, for that matter.) Under Rometty’s watch, the company has divested businesses with a combined $10 billion in revenue. So far, though, the adjustments have yet to reignite substantial organic growth.