by Clement Thibault
Something unsettling has been going on at IBM over the past three years. A DJIA stalwart and renowned blue chip company and stock, International Business Machine Corporation (NYSE:IBM)—founded over 100 years ago in 1911, and often referred to as Big Blue—has been noticeably hurting.
IBM manufactures and markets computer hardware and software, as well as offers hosting and consulting services in a variety of technological areas. The company's distress is evident when looking at its monthly chart for the past few years.
After hitting and hovering around $200 per share in 2012-2013, the company's stock fell as low as $117 this past February. That's more than 40% off the $200 mark.
The life cycle of any business is pretty straightforward. At the beginning there's the idea. With any luck, that becomes a startup. If everything goes well, there's a period of fast growth; If successful, this ends in maturity and profitability. After a stable period (which can take years), a plateau is usually hit, inevitably signalling the approach of a decline.
A company in decline has two options. Either it doesn't change and ultimately becomes obsolete, or it manages to reinvent itself and rise again, into a new period of growth.
Over the past two years IBM has hit its decline phase. Its revenues are down for each of the past three years. In 2012, Big Blue's revenues were $102B. In 2013, that number fell to $98B, falling further, to $92B in 2014. Revenue fell yet another 12% in 2015, to $81B.
IBM's operating income has also suffered, slipping steadily from $22B in 2012 to $16B in 2015. With an eye toward stanching the downward trajectory, the company has cut its cost of revenue, its selling and general expenses, even its R&D expenditures. Unfortunately, none of these efforts have been enough to stop the fall, and IBM is struggling to acknowledge and commit to the changes it needs, much like big bureaucratic entities often do.
IBM has shown that it's ready to reorganize itself in order to survive in this new cloud era. In 2015, it is estimated that IBM laid off some 70,000 employees, trying to "aggressively transform its business", according to an IBM spokesperson. These efforts followed previous layoffs in 2014 which, according to a company spokesman, were meant to allow IBM's "aggressive positioning" towards new technologies.
Reports indicate that those 70,000 employees were almost all replaced by the company. Still, with a headcount of 377,000 employees worldwide, staffing cuts and changes are a process that will take some time to play out.
Luckily for IBM it still has a few things going for it. First, its approximately $700 million in revenues from patents remain a sticky source of income in the form of royalties that continue to quietly benefit the company's bottom line. Correctly, IBM is very protective of this resource. They recently filed a lawsuit against Groupon (NASDAQ:GRPN) alleging patent infringement, proving that this legacy revenue means a lot to the company and continues to be an important revenue generator.
Indeed, last year alone, IBM registered a world-leading 7,355 patents—over two and a half times more than second place Google (NASDAQ:GOOGL). Since the company's inception, it's estimated that IBM has generated over $20-billion in revenue related to the 88,000 patents it has registered.
Aside from its patent revenue, IBM is fairly positioned in a few additional areas, including cyber security software—which generated $2B in revenue for the company last year and experienced 12% growth. IBM is number 3 in this niche, trailing Symantec (NASDAQ:SYMC) and Intel (NASDAQ:INTC).
Another area of strength for IBM is artificial intelligence, with its Watson machine learning technology competing head-to head with Microsoft's (NASDAQ:MSFT) Oxford and Google's DeepMind.
Within the infrastructure-as-a-service market, which includes the all-important cloud computing segment, IBM holds a 12% market share, lagging way behind Amazon's (NASDAQ:AMZN) dominant 27%. But even as IBM continues inking deals to boost its presence within this niche, it's is also seeing Google make major moves. That's not great news.
Perhaps though, the ace up IBM's sleeve is—not surprisingly—its tolerant ownership. Just a few days ago, activist hedge fund Starboard Value moved to overthrow the entire Yahoo! (NASDAQ:YHOO) board. Starboard has just a 1% ownership stake in Yahoo, proving that not much is needed in order to stir up trouble for a publicly traded company.
Luckily, IBM has stronger backing than Yahoo!. As of the end of last year, Warren Buffett's Berkshire Hathaway (NYSE:BRKa) has an 8.59% ownership stake in Big Blue. Buffett bought into IBM in 2011, after being won over by the company's growth road map and past execution. Steadfast stakeholders mean the IBM board has the time and peace of mind it needs in order to plan long-term and sacrifice immediate revenue if needed, a luxury not many companies—public or private—can afford. (Nevertheless, it's always possible that even Mr. Buffet will grow tired of the company's lack of growth and eventually admit he may have made a bad investment.)
All told, the future remains unclear for IBM. It is declining, and to-date it doesn't seem as if there's a grand, transformative strategy in place in order to right the ship.
IBM's CEO Ginni Rometty has said that the company's strategic plan currently focuses on "cloud, analytics, mobile, social and security, " all newer technologies than IBM's original, traditional businesses. But a detailed, revamped business plan—if one even exists—is currently safely concealed within the company's headquarters.
What appear to be initial steps, such as replacing a significant portion of the workforce and taking steps to enter new businesses, seem rather tentative and hardly convincing. Each business IBM has entered is already crowded, and not by small, acquirable startups. Rather the fields are currently dominated by other tech giants.
If IBM wants to avoid obsolescence and be reborn, it needs something convincing to distance itself from the competition. We are still waiting for a clear plan showing how this will happen, even after two years of what the company has called "aggressive" repositioning. From our vantage point, IBM's shareholders should be concerned.
So, IBM's present is uncertain, even with the company taking what it considers drastic measures, and the future is even murkier. With all due respect to Mr. Buffett, there's is absolutely no guarantee of, or reasonable time frame for, a turnaround. This is not to say that IBM will ultimately fold. But if we were to invest in the company—and its 3.5% dividend is in fact quite tempting—we'd wait for the numbers to at least stabilize for a quarter or two before pulling the buy trigger.