Don't Believe The Turnaround Tales: IBM Is Still a Stock to Avoid
This old warhorse of the technology world has seen better days and is now at a crossroads. Tech giant IBM (IBM) - Get Report today is hardly the hardware entity it used to be, even a decade ago. Services have been the mantra for Big Blue, gradually reducing exposure to its slowing legacy businesses.
There are better ways for you to make profits.
Granted, the company's been beating analysts' expectations, but IBM has now reported declining figures for the last 17 quarters.
With its attempts to expand into cloud computing and medical IT uncertain as of now, this fatigued behemoth isn't a smart bet. No wonder analysts are suggesting "under-weight" for the stock. Here is the full story.
If you're a passive income investor who bought IBM merely for its dividends, there isn't any reason to panic. IBM will keep dishing out your dividends for a long time to come. However, if you're an active investor who demands stock price appreciation, you should shun IBM. Even Warren Buffett alluded to the possibility of a mistake in buying IBM.
PCs, hard disk drives and DRAMs are not what makes IBM what it is today. Hardware represents less than 10% of IBM's revenues. Under CEO Ginni Rometty's vision, IBM is now a "services organization." Unlike HP, IBM has moved away from hardware.
To be sure, parts of IBM's business are growing quickly. IBM's strategic imperatives, which include cloud, analytics, social, mobile, and security products, are moving at a double-digit pace. They account for over one-third of the company's top line. But it's not enough to counterbalance its deteriorating legacy businesses.
The market's been kind to IBM's shares over the past few months; they're up 16.16% year-to-date, out-performing the likes of services competitors Wipro (up 2.69%) and Accenture (up 9.22%).
What worked for IBM was the healthy numbers for its cloud business arm; the cloud is critical for IBM's leap into the next era. However, these efforts may never matchAmazon's cloud infrastructure as a service business.
There's also the question of direction and strategy. Currently the cloud is all about evaluating costs: the cost of computing, storing and building new applications on the cloud. IBM, however, wants to position itself as a facilitator of high-value service delivery via the cloud.
Essentially, this is a "Cloud 2.0 approach," when the framework is a platform for innovation. And the rest of IBM's re-imagined service roster, i.e. Watson, Internet of Things, quantum computing and block chain solutions, are all designed to go after highest-value revenues.
IBM has been consistently acquiring assets as well as companies. But these are long-term plans and will only come to fruition well into the future. IBM, we believe, may manage to evolve into a cloud platform and cognitive solutions company eventually, but that might be at least two years away.
There's also no guarantee that IBM will succeed. IBM may need to shed a lot more weight (read lay-offs), and become a smaller and more concentrated enterprise, and yet not gain the kind of sales/profit growth we've come to expect from the sector.
At a forward price-to-earnings growth (PEG) ratio of over 4.47 times, IBM is trading at a big premium to service peers like Wipro, Accenture, Infosys and Cognizant. Avoid IBM; better values can be found.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.