The Motley Fool financial services firm posted an interesting take about IBM and its possible future on its website today.
Analyst Adrian Campos wrote an article called, "Why IBM's End Could Be Near." Kind of scary sounding. I'm sure Big Blue and investors aren't too worried since it was written by a card-carrying Fool.
FYI, here's why the firm uses the Motley Fool name:
The company's name was taken from Shakespeare, whose wise fools both
instructed and amused, and could speak the truth to the king -- without
getting their heads lopped off.
Here's some from Campos' article:
is having a rough year, producing a negative 6% return so far. The
company had a wonderful come-back in the 90s thanks to its cost
reductions and shift toward software and consulting, which led to
amazing financial performance for a decade. And since 2002, revenue,
gross profit, and operating profit have compounded at annual rates of
3%, 6%, and 12%.
However, the current situation is totally different. IBM may need a
transformation and re-engineering of its business. According to many IBM
fans, that shouldn't be a big problem because IBM has been able to
change several times in the past: this is just another time. Bears, on
the other hand, keep reminding us that this time is different. What kind
of future awaits IBM shareholders in the short and long run?
Is IBM's end near?
In the first quarter of 2013, for the first time in 8 years IBM
missed earnings expectations: sales declined 5%, posing a strong risk to
IBM's long-term business, as two-thirds of its revenue base is
Full-year earnings guidance of $16.70 were just $0.07 below the
consensus. But these $0.07 reflected long-term changes in the main
markets IBM addresses: a contraction in global demand for IBM's high-end
systems & hardware, and growth limits in the private cloud
computing segment. These long-term trends started hurting IBM's cash
flow already in 2009 and the $0.07 should have been seen as the
beginning of a series of disappointments and pain for shareholders.
Unfortunately, the second quarter results did not show the kind of
substantive change that investors were looking forward to. IBM did beat
the consensus by a tiny margin.
That was just not enough.
Analysts had kept estimates low but their expectations were actually
higher: they tacitly were expecting a major change in business focus,
which did not seem to happen. As a result, institutions from Credit
Suisse to UBS downgraded the stock. It's simple to understand the
downgrades: margins were down 3% from last year. The elephant is
spending the same or more money, but making much less than before.
Now, similar results coming from other companies in the software and services sector, like Oracle, show that the whole industry is in trouble. But to make
matters worse, IBM still has 34% (hardware + System Z server sales) of
its revenue coming from the commodity-like hardware segment, which
is even riskier than the services segment, because of increasing
competition from Intel's cheap machines.
In "IBM: The End is Near, investor Arne Alsin identified a massive paradigm shift as the root of
all of IBM's problems. The industry is moving to the public cloud:
low-cost yet powerful computing architecture. IBM's main products (e.g.
System Z and private cloud solutions), on the other hand, depend on the
old paradigm--the private cloud, a soon-to-be legacy business.
Final foolish thoughts
I agree with Alsin in the sense that the demand for expensive,
multi-million dollar systems (let them be private clouds or something
else) is contracting. Companies are moving to the public cloud instead.
Expensive frameworks and commodity-like x86 servers are becoming
That being said, I also don't want to underestimate the ability of
IBM to change its business radically. Big Blue has done it several
times. The latest time was when it exited the PC business in 2004 by
divesting its PC unit to Lenovo. This was done 2 years after HPQ acquired Compaq
and at a moment where the PC business was still strong. The elephant
prioritized the sustainability of the business rather than meeting the
street consensus for the next quarter.
A similar strategy and radical changes of focus are in great need
again. This goes beyond acquiring companies with strong exposure to the
public cloud (IBM recently acquired SoftLayer for $2 billion, 5 times revenue).
Finally, there will always be demand for expensive private clouds,
for institutions willing to pay 100% more in price for an additional 5%
safety improvement. What IBM needs to do is to reduce the exposure to
such business, as soon as possible. In the meanwhile, the safety of
having institutional clients and its vast resources will allow Big Blue
to survive, but don't expect superb returns during the transition. It's
gonna take a while, since it's just starting!