So far Donald Trump has been very, very good for International Business Machines Inc. (NYSE:IBM). IBM stock is up 8% since his election — even more than the S&P 500 — and just opened for trade at $168.50. That was at a price-to-earnings multiple of 13.7, no less — the highest it has seen in some time.
Now, IBM is returning the favor.
When Trump decided that the nation’s tech executives must meet with him at Trump Tower, IBM CEO Virginia Rometty came bearing a PR gift — a promise to hire 25,000 U.S. workers over the next four years.
As a practical matter, the statement is silly. IBM adds 70,000 people to its headcount in an average year, but loses even more. It employed 378,000 people in 2015, 20,000 fewer than at the bottom of the 2009 recession.
Still, the promise put Rometty in front of the press, in a positive light, allowing her to talk about “new collar” jobs filled through vocational training. And that could keep momentum in IBM stock going for weeks.
Irrational Exuberance in IBM?
Irrational exuberance is the term that then-Federal Reserve chair Alan Greenspan coined during the dot-com bubble of the 1990s, describing optimism without a rational base.
That describes the stock market, and IBM stock, since the November election.
The company’s gains in the past month have come despite the company having lower revenue in September than in the previous year, $19.266 billion, with lower net income. The rally has dropped the yield on the $1.40 per share quarterly dividend below 2%, and operating cash flow today is lower than in 2011, when IBM was selling at near $200 per share.
IBM stock analysts are said to be extremely hopeful about the fourth quarter, with earnings of $4.91 per share on revenue of $21.74 billion expected. That’s great … until you realize that the company earned $4.58 per share on revenue of $22.06 billion last Christmas.
IBM, in short, remains a troubled giant that continues to lose altitude. Its present market cap of $162 billion is less than one-third of Microsoft Corporation’s (NASDAQ:MSFT) $496 billion, and less than a quarter of the $625 billion value of Apple Inc. (NASDAQ:AAPL), both of which are, at age 40, less than half as old as IBM, which turned 100 last year.
In the past 20 years, IBM has missed more trains than a commuter with a broken alarm clock. And this is the U.S. tech leader Trump expects to turn America around?
Good luck with that.
Experiments Going Nowhere
IBM does have some things in common with Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), which just celebrated its 20th birthday with a market cap of $560 billion. It has a lot of “moonshot” projects adding nothing to its bottom line.
Take IBM’s Multi-User Eldercare Robot (MERA), which came out of a Rice University project called CameraVitals. (Full disclosure. I’m a 1977 Rice graduate. History major.) The problem is that Japan has been actively failing in this business for years, believing Eldercare robots can take the place of immigrant care givers.
IBM has put its vaunted Watson AI system to work Christmas shopping, it has launched a blockchain ecosystem and it is working on indoor architecture with Delos, a “wellness real estate firm.”
It all sounds great, but IBM remains, at heart, a company with a fading mainframe monopoly, too much high-cost cloud capacity to compete in the market, and a lot of shiny tech trinkets it has no idea what to do with.
IBM is like a Christmas tree. January is coming.
Bottom Line on IBM Stock
Credit Suisse analyst Kulbinder Garcha says low tax rates in Japan and sales of intellectual property are holding up the company’s earnings, and that operations are still underperforming. He has a $110 price target on IBM stock. Projects are failing and cash flow is deteriorating.
There is always a certain amount of optimism around any presidential inauguration, but the current recovery is eight years old, and it has mostly passed IBM by.
Betting on big gains from here looks as foolish as a Wisconsin recount.
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 did not hold a position in any of the aforementioned securities.
