If you put money into stock of IBM (NYSE:IBM) five years ago, you’re down about 20%. But you have gotten about half that back in dividends. Unless you think of IBM stock as a bond, whose principal declines as interest is paid out, that’s not a good deal.
Fortunately for IBM, income investors can make that trade, which is why the stock has held up as well as it has.
IBM is simply old money, living off its interest. Sales have fallen steadily since 2013, from $100 billion per year to about $80 billion. (Even if it hits its $22-billion revenue target this quarter, IBM will fall short of that mark.) Operating margins have also declined, from over 20% in 2012 to 15% last year.
Despite this, 8 of 28 analysts following IBM stock put it on their buy lists. What’s wrong with these people?
IBM still has a good marketing shop, and it has claimed to be in early on all the big trends of the last few years. Artificial intelligence? Watson was claiming it years ago. Cloud? IBM bought Softlayer in 2013. Blockchain? IBM says it is laying the groundwork for blockchain domination.
People want to believe in IBM. I once owned shares of IBM stock but threw in my hand at about $180 per share. Now Warren Buffett is throwing in his hand. The IBM stock price opened for trade today at just over $154 per share, on a share count that has been declining for years.
Each leg down in the stock leads some investors to insist it’s all washed out. Barron’s recently put out a bullish article, saying its decline has slowed, making it undervalued. That’s slowed, not stopped. Even our Vince Martin is nibbling again.
Here is the secret of technology markets, which I have covered for over 35 years now. In technology, you grow, or you die. IBM is not growing. It is dying, slowly yes, but so am I.
At the heart of this death is IBM’s mainframe business, a virtual monopoly since the 1950s and the object of antitrust objections since 1956. Mainframes still have a role in banking, but the business is slowly dying, even as IBM releases new models that are fully buzzword compliant, meaning “AI,” “cloud,” and “blockchain.”
You don’t notice your own aging on a scale of a month or a quarter. Over 30 years, you’re not going to deny it. IBM has been fading since it lost the war for PC operating systems to Microsoft Corporation (NASDAQ:MSFT) a generation ago.
The great Lou Gerstner got the equivalent of a late life bloom out of it, with its turn to services, but IBM hasn’t been part of the “great game” in technology since the 1980s.
Every year or two, the company “transforms” its service model. It still sees itself as a vendor, as a solutions provider to its “customers.”
In the enterprise space, there are no such things, just partners building their own expertise. It’s this vendor-customer attitude that leads to things like the Equifax breach (even though IBM had nothing to do with it). No scaled company depends on its vendors anymore. It takes responsibility, or it fails.
Bottom Line on IBM Stock
IBM is an old dowager selling off her jewelry piece by piece. The company keeps laying off people in the West, while it hires in the East to cut costs. IBM now has more employees in India than the U.S.
IBM, founded in 1915, has a market cap of $142 billion. Facebook Inc. (NASDAQ:FB), founded in 2004, is worth $508 billion.
Do the math. Even as a bond, it’s overvalued.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.