Uphill Drive For IBM

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Jan 22, 2015

International Business Machines Corporation (IBM, Financial) also referred to as the "Big Blue," provides computer hardware, software and IT consulting services. The company was founded in 1911 in New York and has been in the business for more than 103 years. It has a market cap of more than $155 billion and serves 170 countries which cover almost the entire globe. During its century-old span in the technology sphere, the company has undergone drastic transformation in terms of products and services and is still in the process. IBM is the largest technology service company in the world and until a few years back was also regarded as a leader in innovation.

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Market position

For the past couple of years, market has seen a radical shift in the way computing is done. Whether it is software, hardware, storage, servers or security, everything is revolving around the currently trending buzz word "Cloud Computing." Cloud Compute has radically changed the way the big old horses like IBM, Oracle (ORCL, Financial), etc. look at their corporate and retail customers. The consumers of technology are moving away from big mainframe computers and the system of software on each system.

Action at IBM backstage

IBM has been undergoing a lot of structural changes, and the company has been consolidating its position for some time now. IBM is trying to realign itself to the changing market environment and focusing on the products that are currently in huge demand like Data Analytics, Big Data, Artificial Intelligence programs, Mobile Security and Cloud Computing software. It has tried to drop some low-profit businesses like low-end servers; semiconductors, etc. from its portfolio and concentrate on security software and Cloud services. But this repositioning is not reaping the expected results and the transition in the core business format is reaping rather slower results and for the past three years the revenues have only been shrinking.

The company bought back shares worth $5 billion in October 2014. Earlier in the same year it repurchased shares worth $13.5 billion. IBM came under sharp criticism due to these decisions as the existing investors and stake holders felt that the company could have invested this money to fund new technology and products.

Stock performance

The stock is currently trading at between $150 to $160 zone. The stock was trading around $146 to $147 in 2011 around the same time although it is noteworthy that IBM stock had surpassed $200 mark in mid 2013. The company posted an 11 to 12% drop in Q4 revenues and reported a figure of $24.11 billion against the analyst expectation of $24.65 billion. Revenue from hardware, one of IBM’s core businesses stood at $2.41 billion which is a sharp decline of 39%. This has not come as a shocker to many as it is the 11th consecutive quarter of drop in revenues for IBM. The new avenues have failed to bring back the lost glory and IBM’s revenue fell to $93 billion in 2014 as compared to $107 billion in 2011. The company abandoned its forecast to hit $20 per share in operating earnings for 2015 and realigned the figure to be somewhere between $15.75 to $16.50 per share. The higher mark just missed the analyst expectation of $16.53.

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Competitor’s run

The Company competes fiercely with Apple Inc. (AAPL, Financial) and Hewlett-Packard Company (HPQ, Financial) on hardware and technology front but interestingly IBM is also a vendor to these companies, providing hardware components. IBM is working closely with Apple to develop specialized business applications for iPhones and iPads to be used by Airline, Telecom employees and other corporate consumers. Under IBM’s multi-vendor support service it provides hardware support to HP/Compaq, Dell (DELL), Cisco (CSCO), Sun, etc. The company released a powerful new mainframe computer in the beginning of this month which is capacitated with quick and secure processing of routine transactions with a focus on mobile e-commerce companies.

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Our take

IBM needs to get its act together as soon as possible to sustain the legacy of an innovative technology giant and prevent a further dip in the stock prices. Otherwise the investors will be pushed to consolidate their positions and cut the losses.