Should You Buy International Business Machines Corp. (IBM) Stock in 2017?

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The year 2016 was a bad one for International Business Machines Corp. (NYSE:IBM) bears like me.

Should You Buy International Business Machines Corp. (IBM) Stock in 2017?

The stock is up 21% in the past year. Revenues should approach if not exceed 2015’s $81 billion. That’s great considering 2014 had $91 billion in revenue.

IBM is still bringing more than 10% of its revenue to the net income line, and can easily afford its $1.40 per share quarterly dividend from earnings. Even with its 2016 gains IBM remains a yield stock, meaning you should get back 3.3% of its cost back next year from dividends.

So why do analysts consider it a weak hold? Why do three still have it on their sell lists? For that matter, why do I think tech investors should avoid this stock like it has a disease on it?

It’s nothing personal but IBM, which turned 100 in 2015, is no longer a tech leader.

What IBM Lacks

Today’s IBM is mostly a custom software company, more like Cognizant Technology Solutions Corp (NASDAQ:CTSH) than anything else. (I wish I could compare it with Accenture Plc (NYSE:ACN), which is a buy.)

IBM “sold” its chip-making arm to Global Foundries in 2014. I put sold in quotes because IBM paid Global $1.5 billion to take it, like an aging center an NBA team moves to clear cap space.

IBM no longer makes PCs or servers. It sold those units to China’s Lenovo. IBM still makes acquisitions. It made a dozen just in 2016. But most are additions to things the company should be doing better at itself, like digital marketing or cloud maintenance. Others are enhancements to rivals’ software platforms, like those of Salesforce.com, Inc. (NYSE:CRM) and Microsoft Corporation (NASDAQ:MSFT).

By rights IBM should be the cloud leader. That’s the heritage of its mainframe monopoly, and its dominance of the PC market in the 1980s. But even after buying SoftLayer in 2013 IBM’s share of the cloud market is stuck in single digits. Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) should pass it this year.

The best-known product in the IBM stable today is Watson, a cloud front-end named for its legendary founder. But the company still won’t reveal how much revenue Watson brings in. You think they would do that if Watson were growing like gangbusters?

IBM’s Problem Is Basic

I have covered IBM for nearly four decades now, and its problem is basic, built into its corporate DNA. IBM is first and foremost a marketing company. It is accustomed to having time to build, market and explain what corporate customers need before they need it.

The market no longer gives anyone that kind of time.

Former IBM CEO Lou Gerstner had a vision, and turned IBM into a services company. Then he handed it off to a nice marketing person, Sam Palmisano, who handed it off to another nice marketing person, Virginia Rometty. IBM is run by suits, not by technologists, and certainly not by visionaries.

IBM has a lot of very bright people doing very good work, but it has no idea how to turn that work into money because it lacks a vision that can be explained in a short sentence. Corporate computing is not a vision, it’s a market. Artificial intelligence, as IBM sells it, is just a capability. I still don’t know what Watson does beside play Jeopardy and talk to celebrities using Stephen Hawking’s old voice box.

IBM Stock Better off Dead?

When I was a kid, many of my neighbors on Long Island were IBMers, and IBM was the dominant technology company. There was IBM, and a BUNCH of competitors, all far behind.

Even with its 2016 gains IBM is smaller, by market cap, than 20-year-olds like Amazon.com, Inc. (NASDAQ:AMZN) and Google, even smaller than relative niche players like Oracle Corporation (NASDAQ:ORCL) or chip specialist Intel Corporation (NASDAQ:INTC).

IBM’s market cap is now a fraction of that of Apple Inc. (NASDAQ:AAPL) and Microsoft, whose now-legendary founders IBM was treating like children when I started covering technology in the 1980s. Both could now buy it easily — not that they would want to. Apple could do it for cash, with change left over.

In technology, you’re either growing or you’re dying. IBM has been dying for a very long time. You can still extract some dividends from it, but at its present price you won’t get enough yield to make the purchase worthwhile.

And I don’t see it getting better.

Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, GOOGL, MSFT, and INTC.

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Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


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