IBM Struggling Under a Cloud

NEW YORK (TheStreet) -- I'm an IBM (IBM) shareholder. Have been for several years. And I've been a happy one.

But an increasing number of IBM shareholders are becoming unhappy, are bailing on the company, and are asking whether CEO Virginia Rometty is up to the task of running it.

The company reported lower revenue for the third quarter, in part blaming China, saying it will increase its sales there once the Chinese government's latest economic plans are set next month.

Instead, the company's stock plunged in the pre-market, down below $173. This is a stock that was over $210 as recently as April, and the plunge is taking place against the backdrop of a rising market. If IBM isn't working, there are plenty of other places to put money.

While it is possible that Rometty has lost the plot, and I'm sure plenty of writers are going there this morning, it's also possible that this is just a product transition and that the company is well-positioned. Since that's the road less traveled, let's go there.

The world is moving from what was once called "enterprise computing" toward cloud. But instead of moving from that platform toward a "hybrid cloud" system of privately run clouds and compatible public systems -- and maintaining budgets -- big businesses have been experimenting with public clouds and starving their existing enterprise systems for funds.

IBM makes those enterprise systems.

During this transition, dirt-cheap public clouds like Amazon ( AMZN) have been the way to go. The best example of this is the recent CIA contract, which IBM lost to Amazon, and whose award was recently upheld, as our Andrea Tse reported. .

Instead of trying to make its existing systems compatible with cloud, the spooks are building their own dirt-cheap cloud and, from a software standpoint, starting from scratch.

That could, over the longer run, offer IBM opportunities, because Amazon's cloud is just infrastructure. It doesn't have the software tools of a platform, and tools have to be used in order to build applications, which are the real aim of any computing system.

But serving that market will require more investment, and more acquisitions. IBM must either build Amazon-compatible tools or buy some.

Should Rometty have anticipated this possibility and planned accordingly? Yes. But IBM is not the only big company that has been blindsided by the appetite for cheap public cloud over expensive hybrids. And there is evidence that hybrids are starting to gain traction.

It's right there in the earnings statement. Cloud revenue is up more than 70% year to date. Even mainframe sales are up 6%, and the services backlog is up 2%. The big shortfall is in "systems and technology" -- the old enterprise business -- down 17%.

So what's killing IBM is an accelerating product transition toward the public cloud, and it may indeed be ready to make big money on the hybrid systems that will follow from this. But try explaining long-term technology trends in a short-term investment world.

The seat Virginia Rometty is sitting on is about to get very hot.

At the time of publication, the author was long IBM

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

Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.

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