International Business Machines Corp. (NYSE:IBM) shares have been rising most of the year as investors look more toward dividends and value than growth. At $162 per share, IBM stock is up 25% from its February low of about $120 per share, and up 18% from its Jan. 1 price of $137.
The dividend is up, too, to $1.40 per share from $1.30, and the price-to-earnings multiple is up, too — to 13.1 (Apple Inc. (NASDAQ:AAPL) is slightly lower at 12.6).
But to justify the IBM stock price, it has to win in the cloud. It’s not.
Consider IBM’s second-quarter earnings report. IBM includes all its cloud revenue in a segment called Technology Services and Cloud Platforms. Sales for this segment during the quarter came in at $8.857 billion. That’s pretty good. But sales for the same quarter last year, in the same segment, were $8.898 billion.
Remember, this is the fastest-growing part of the computing market. Gartner Inc (NYSE:IT) is expecting $204 billion in revenue from cloud infrastructure alone this year, a rise of 16%. IBM is barely holding its own.
IBM stock has to find growth somewhere because its mainframe business, which it now calls the zSeries, is collapsing. During the second quarter, these so-called Systems Revenues came in at $1.950 billion. A year ago, they were $2.541 billion. There have been rumors circulating that IBM might sell the mainframe business, but for now, these are just rumors.
The bottom line was that IBM stock earned $2.61 per share during the quarter, covering that $1.40 per share dividend almost two times. A year ago, in the same quarter, it earned $3.57 per share, covering its $1.30 per share dividend nearly three times.
IBM: Spinning the Cloud
IBM is left spinning the cloud like a political candidate trying to unskew polls. This is not good.
It’s easier to do than it sounds, because “cloud” can mean many things. It can mean infrastructure, or so-called “bare iron” rental of capacity. It can mean a platform, adding the tools needed to create valuable services. Or it can mean the services themselves. IBM combines all these things, and others, in its Technology Solutions and Cloud Platforms segment.
Analysts like Gartner, however, make their money sorting through all this. Its latest “magic quadrant” puts IBM in the middle of the pack for cloud. In terms of infrastructure as a service, it’s a laggard … a niche player.
IBM’s response to this included a press release hailing its success in data center outsourcing and infrastructure utility services it acquired with SoftLayer in 2013. In a blog post, it called the Gartner analysis “shortsighted.” It also points to other research from Synergy that is more positive on its prospects.
Bottom Line on IBM Stock
Gartner’s report notes that, when IBM acquired SoftLayer, it bought a company that could deliver bare-bones services to start-ups and gaming companies looking for dedicated hosting.
It has since been focusing its cloud services on large enterprises that need a wide range of services, but Gartner says SoftLayer is missing many of the features those customers want. IBM insists they will get those services from BlueMix, but Gartner does not see the company as a leader.
IBM can argue against Gartner, or other analysts, or this article, all it wants. But for investors, the bottom line is the bottom line. IBM’s bottom line is shrinking, and growth in cloud is not making up for losses in other areas.
It’s the kind of thing that can keep an IBM stock bull up at night.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not own a position in any of the aforementioned securities.
