Luke Lango Issues Dire Warning

A $15.7 trillion tech melt could be triggered as soon as June 14th… Now is the time to prepare.

Tue, June 6 at 7:00PM ET

Big Blue Took a Page From Dorian Gray’s Playbook

  • IBM (NYSE:IBM) stock remains up for the year despite the general tech wreck.
  • IBM pushed many of its past sins onto Kyndryl, which is down 67% since the spin-off.
  • Red Hat gives IBM mainframe customers an off-ramp to the cloud and could make the company a takeover target.
Photo of IBM (IBM) building as seen through the canopy of a tree. IBM logo is in large letters on side of building.

International Business Machines (NYSE:IBM) has stood firm in the face of the bear market that crushed most tech stocks. While the Nasdaq is down 32% year to date, IBM has managed to deliver a 1% gain.

Some credit should go to IBM’s quarterly dividend of $1.65 a share, a payout that yields 4.9%. Some should go to the company’s latest earnings report, in which revenue was up 8% from a year ago to $14.2 billion. And some should go to its spin-off of Kyndryl (NYSE:KD), the company’s former managed infrastructure services business.

KD stock has been crushed since coming public in November, down 67%. Meanwhile, IBM stock is up around 10%. For IBM, Kyndryl is like the picture Dorian Gray hid in his closet.

IBM International Business Machines $135.02

Kyndryl and Blame-Shifting

I have been down on IBM for years. The Kyndryl disaster was just one reason. A company that’s supposed to save customers money leasing offices atop the new One Vanderbilt tower contradicts itself.

Kyndryl reported a loss of $229 million, or $1.02 per diluted share, on revenue of $4.4 billion for its first quarter as an independent company. It also found itself in court against its former parent, blamed for the revenue shifting of former IBM CEO Virginia Rometty and her lieutenants, including Kyndryl CEO Martin Schroeter.

IBM hasn’t been able to lay all its past sins at Kyndryl’s feet, though. It faces a $1.6 billion judgment for allegedly poaching AT&T (NYSE:T) business from privately held BMC Software. The suit involved mainframes BMC serviced since 2007 and IBM’s alleged violation of a 2015 agreement. The award, if enforced after appeal, would represent over six months of IBM’s income.

The Red Hat Opportunity

Investors appear to be ignoring IBM’s legal troubles because of the opportunity afforded by IBM’s Red Hat unit.

Red Hat’s Linux operating system and OpenShift cloud platform give IBM a way to move its customers off their aging mainframes and into the cloud. Red Hat now represents a substantial percentage of IBM’s total business and lets IBM sell itself as a hybrid cloud company.

Red Hat could also benefit from Broadcom’s (NASDAQ:AVGO) coming acquisition of VMware (NYSE:VMW). Broadcom has a history of buying companies with captive customers and squeezing them for profits like it’s a pharma bro. Customers already fear the deal will stall innovation at VMware. This could lead some to make the transition to Red Hat’s cloud products.

TechCrunch’s Ron Miller called Red Hat “the tip of the spear for IBM’s rejuvenation strategy.”  IBM promised Red Hat could remain independent after it was acquired and, while CEO Arvind Krishna did push out former Red Hat chief Jim Whitehurst, he has kept the promise. Red Hat still runs its own annual customer conference, the Red Hat Summit, and Red Hat CEO Paul Cormier calls its remote workers “the new normal.”

The Bottom Line on IBM Stock

Krishna has done a marvelous job covering up most of IBM’s past sins. However, the BMC judgment should concern investors because this is not your father’s IBM. Today’s company is small next to its cloud competitors, and $1.6 billion would be a lot of money.

But IBM could now be a tasty acquisition for a larger tech player, like Oracle (NYSE:ORCL), Broadcom or even Microsoft (NASDAQ:MSFT). Once the tech wreck is over, I expect one of these players to pounce, which could lead to a tasty takeover battle.

But whoever wins won’t be getting the old IBM. That company is dead. You may have one big win ahead in IBM stock, but I’m not going to invest my money hoping for it.

On the date of publication, Dana Blankenhorn held a long position in MSFT. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

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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