Has IBM Finally Gotten Cheap?

NEW YORK (TheStreet) -- I felt bit vindicated upon learning Tuesday that Credit Suisse had downgraded IBM (IBM), while citing concerns over -- among other things -- the company's "organic" growth."

It wasn't that I was happy about this "new discovery." But I recall being proclaimed as "public enemy No.1" upon my asking three months ago, "At what point does IBM become overrated?"

It wasn't meant as a slight against the tech giant. After all, there's no debate that IBM has earned every bit of respect that it gets. But I was nevertheless annoyed by the apparent double-standard under which the company operates.

I won't argue that IBM continues to be a very profitable company. But I'm constantly in awe of the fact that despite IBM's lack of revenue growth over the past couple of years, the company's never really lost its bellwether status on Wall Street. It's as if the company is immune to criticism.

This is despite having spent more than $16 billion over the past five years in acquisitions, trying to grow the top line. It hasn't worked. Nor has it seemed that Wall Street has cared.

The stock, meanwhile, which has never really been cheap was posting gains of more than 150% during that span. Nor did shares of IBM ever fall more than 15% over the past twelve months. This is even though rivals like Salesforce.com ( CRM), which has done an excellent job building itself into a leading software-as-a-service (SaaS) business, was winning market share from IBM.

By contrast, Apple ( APPL), which, had posted exceptional growth during that same span, has had its valuation cut by almost in half from a high of $705 to a low of $385. Everyone was somehow ready to bury Apple but not IBM.

I'm not blaming IBM for this, though. But still, I felt it was time to draw attention to these fundamental inequalities. And after IBM's second-quarter earnings report, I believe investors have finally gotten the memo; Big Blue needs to perform better for these shares to make sense.

Revenue, with which the company has long struggled, fell again by 3% -- missing analysts' estimates for the second consecutive quarter. If you believe that I'm being too hard on this company, understand that this quarter's 3% revenue drop preceded 4% decline in the April quarter, which then preceded a 2% drop in the January quarter.

I'm sure by now you get the picture.

I believe that if this was any other company not named IBM, say, BlackBerry ( BBRY) or Microsoft ( MSFT), there would have been a deluge of articles proclaiming the company's death.

But not IBM. And when looking at the results on a segmental basis, there are even more reasons for concern. First, I don't like the fact that the company's usually strong service business was down 4% year over year.

Service revenue has been IBM's "offsetting strength" -- supporting the company's perpetually weak hardware business, which was down again this quarter -- this time by 12%. It's time that investors face a new reality -- this company is no longer untouchable. It's going to be hard for IBM to maintain any sort of competitive advantage over Oracle ( ORCL) and Accenture ( ACN).

There aren't enough data to suggest that IBM is losing share to either company. But I can tell you that neither has enjoyed the benefit of the doubt that has IBM. And nor do their stock prices presume perfect execution.

Along those lines, the fact that IBM posted a margin decline of close to 2.5%, which led to a 15% decline in operating income, suggest that IBM is seeing some pricing pressure -- likely from Oracle and Salesforce.com.

These earnings results, as lackluster as they were, didn't vary too much from IBM's first-quarter outcome, upon which I recommended selling the stock. Shares were trading at around $205 at the time. Today, investors have begun to pay a little more attention.

While, I don't believe that this quarter or even the next will be enough to define IBM's long-term outlook, it does, however, force a sort of reevaluation about how this company is judged. Even with its strong balance sheet, which included $10 billion in cash, I don't think I can force myself to buy this stock -- at least not until revenue growth returns. But should the stock fall another 5%, say, to $180, at that point I'll reconsider.

At the time of publication, the author was long AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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