IBM to Cut 1,700 Jobs as Transformation Continues

This won’t have an effect on IBM stock

Online message board The Layoff revealed June 6 that IBM (NYSE:IBM) was cutting approximately 1,700 jobs from its global workforce of 340,000. Later on the same day, the company confirmed the cuts.

IBM stock is an underappreciated buy
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“We are continuing to reposition our team to align with our focus on the high-value segments of the IT market, and we also continue to hire aggressively in critical new areas that deliver value for our clients and IBM,” stated a company spokesperson in an email to CNBC.

If you think this round of job cuts will be good for IBM stock, I’d forget that idea. The company’s stock is unlikely to go much higher in the near-term until investors get a better sense if Red Hat (NYSE:RHT) is going to be the savior CEO Ginni Rometty says it will be.

Here’s why.

IBM’s Got 7,700 Job Openings

IBM has 7,700 vacant jobs listed on their site, but don’t expect them to be filled soon. IBM’s $34 billion acquisition of Red Hat is set to close in the second half of 2019. Red Hat has 13,360 employees. It’s unlikely that IBM is going to fill many of the vacant positions until it completes the acquisition using some of the Red Hat employees to fill outstanding positions.

In addition, the statement from the company from above suggests that as it continues to integrate Red Hat into the fold and develops a battle plan for capturing some of the high-value segments of the IT market (with Red Hat’s help), it will become readily apparent how many of the 7.700 jobs it actually needs to fill. The rest will be permanently closed.

IBM’s been cutting jobs since 2016, and yet revenues and profits have remained virtually the same in the three years since. You can only cut jobs and expenses for so long. Eventually, you must grow your way out of trouble.

Or, if you’re IBM, buy your way out.

At least that’s the plan.

Is Red Hat the Savior for IBM Stock?

The answer depends on who you talk to.

Evercore ISI analysts Amit Daryanani and Irvin Liu recently initiated coverage of IBM stock and had this to say about the company:

“While IBM stock will likely be range bound near-term, as investors remain on the sidelines until they have a better understanding of IBM’s financial profile post close of the Red Hat acquisition, our positive stance is based on our favorable view of the RHT deal which has the potential to be transformational as it significantly broadens IBM’s capabilities and customer reach,” the two analysts wrote in a June note to clients.

Rometty believes it will be a home run.

“This is about resetting the cloud landscape and we will be the undisputed, number one leader in hybrid cloud. We’ve been really building our business for this moment,” Rometty said in October after announcing the Red Hat acquisition. “To lead in the second chapter of cloud, it’s all going to be about hybrid cloud. Hybrid cloud is an emerging $1 trillion market.”

While I agree with Rometty that the hybrid cloud is going to be huge, I have a hard time believing that she’s spent the past seven years dreaming about the possibilities. If she had, Red Hat would have become a part of IBM a lot sooner.

This acquisition, as my InvestorPlace colleague Ian Bezek recently said, himself a shareholder, a must win.

The Red Hat deal absolutely has to pay off. Otherwise, IBM stock will be an even worse performer going forward. I personally still own IBM stock, but I have it on a leash. The stock would be a sell if IBM management bungles the Red Hat purchase. For IBM, it’s do or die time,” Bezek wrote June 4.

One analyst believes IBM’s purchase of Red Hat was an act of desperation.

“It’s a desperate deal by a company that missed the boat for the last five years,” BTIG managing director Joel Fishbein said about the deal in late October. “I’m not surprised that they bought Red Hat, I’m surprised that it took them so long. They’ve been behind the cloud eight ball. ”

I agree.

In November, I argued that IBM stock would never revisit $200 with Rometty as CEO. As the deal gets nearer, I don’t believe anything’s changed for me to think she’s the right person for the job. She’s the one that put the company in such a desperate position.

The Bottom Line on IBM Stock

The fact that IBM stock is up 19% year to date through June 6 is impressive in itself because the company’s stumbled severely in recent years. That is up so much says more about the state of the markets than IBM.

No amount of job cuts is going to move IBM stock higher at this point.

The only thing that will move it closer to $200 is proof positive that buying IBM wasn’t a colossal waste of money. I’m not convinced, and neither are a lot of other investors.

As a result, IBM could be dead money for the next 6-12 months.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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