IBM - will the over 100-year-old ship turn once again?

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"This is a bit unfortunate, given Nordcloud’s strong growth and its position as one of the toughest cloud-focused IT firms (AWS/Azure). I would have gladly seen Nordcloud on First North.

Regarding IBM and the question in the title, I don’t believe the ship can turn around anymore; it’s mostly sinking. They were very late to the cloud game, with AWS and Azure light-years ahead, and IBM’s development budget offers no chance of catching up. Perhaps IBM will achieve a new rise in the future with quantum computers, but as for the cloud, the game is already lost."

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In addition, IBM has completely lost its clear leadership in AI development, which the company held for a long time during Watson’s heyday. Just a few years ago, IBM strongly believed in the rapid commercialization of its AI products. Investments in product development, marketing, etc., were enormous, and at the same time, companies were being acquired from all sides. A massive misjudgment.

Edit: Here’s an example of the level of hype in 2016-2017: “Ginni Rometty on the End of Programming. The IBM chief dares to imagine what Watson will be when it grows up, and reaffirms her pledge to hire 25,000 people over the next four years.”

https://www.bloomberg.com/news/features/2017-09-20/ginni-rometty-on-artificial-intelligence

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As for the cloud, they were badly delayed, AWS and Azure are light years ahead, and IBM’s development budget has no chance of catching up.

They changed their cloud strategy a couple of years ago towards multi/hybrid-cloud, meaning they are banking on their own products running flexibly on all competitors’ clouds with the help of Kubernetes. The Nordcloud acquisition also supports this.
The development of their own cloud has been pretty much at zero for some time now. Which is a bit of a shame, from an end-user perspective, IBM’s cloud tools are still significantly more usable than, for example, AWS’s.

Perhaps IBM will achieve a new rise in the future with quantum computers; as for the cloud, the game is already lost.

Having familiarized myself with this side as well, IBM at least has a very sensible strategy; even though they are developing their own hardware, on the software side they have done quite high-quality work with technology-agnostic quantum programming tools, meaning they will remain relevant in the field even if someone else manages to develop a functioning machine before IBM.

Disclaimer: I do not own and do not intend to buy, I have just been tinkering with IBM products due to work. It will be interesting to see how the company’s split affects things from a salesperson’s target perspective.

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It’s interesting to compare the stock performance of these dinosaurs, below are the 5-year charts for Fujitsu, CGI, and IBM…

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What causes such different developments, in what I understand to be very similar businesses?

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{“content”:“An interesting comparison of stock performance, but they are not entirely comparable.\n\nWhile revenue shares might suggest otherwise, the lion’s share of IBM’s profit over the last 15 years has come from traditional software business. This pillar has eroded over the years as customers are no longer willing to pay upfront licenses for software, and increasingly, they have moved to pay-as-you-go models, where volumes must be large for anything to remain on the bottom line. At the same time, IBM’s qualitative competitive position in software has deteriorated as customers have shifted from WAS and DB2 to open-source.\n\nFujitsu and CGI, to my understanding, have always relied more on service business.”,“target_locale”:“en”}

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Yeah, you’re right. I can’t find very precise figures for Fujitsu; my understanding is that their business is very different in Europe vs. Japan, with the latter supposedly focusing more on the application side.

But I must say, I was surprised by how strong their development has been compared to IBM.

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This is true, but there are great uncertainties associated with this strategy. Kubernetes is the de-facto platform for container technology, but it is open-source, and each of the major cloud providers (AWS, Azure, Google Cloud) offers its own managed Kubernetes service practically at the price of just the compute infra. IBM/Red Hat’s counter-move to this is Openshift, whose value proposition is to offer a container platform that works in any cloud or even in a traditional data center. Time will tell if this value proposition will be adopted on a large scale; it’s not straightforward. In addition, all three major players are expanding their offerings to the same multi-cloud market.

With the Nordcloud acquisition, IBM significantly strengthens its multi-cloud service capabilities in Europe, but the service/consulting business never brings the same margins or scalability as the traditional software business did.

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I decided to divest from IBM myself, an investment of about 6000 euros, although the pot was quite small compared to the size of the rest of the portfolio. Below is the comment I posted on Shareville about the sale:

After long consideration, I sold all my IBM shares at pretty much a zero return, although I did receive dividends from this for a couple of years, so I still made some profit. It was also a relatively small part of my portfolio anyway. The company and especially its future are quite different from what they were when I first bought it in 2018: the CEO has changed, RedHat was bought, and now the company is going to be split into parts, etc. None of these moves really convince me.

The acquisition of RedHat has been criticized as ridiculously expensive; it’s difficult to evaluate precisely myself, but it certainly wasn’t cheap. I’ve closely followed the implementation of IBM’s (or rather, RedHat’s) OpenShift in a fairly large Finnish company, and it hasn’t gone entirely smoothly. RedHat alone can’t be blamed for this, but I still have bad personal experiences with it. As a coder, I still don’t understand the selling points of RedHat’s products.

The company’s new CEO, Arvind Krishna, also doesn’t convince me. Why put someone in charge of the company who was previously responsible for cloud and AI businesses that, despite small growth, haven’t really met expectations? I would have preferred to see a completely external visionary at the helm. Even if it’s a bit stereotypical, I don’t have much faith in Indian CEOs myself; it reminds me so much of Nokia and Rajeev Suri: he seemed competent superficially at first, but in the end, it was all empty promises and pretty much the same you see from Indians in the IT sector otherwise, i.e., not admitting problems and claiming everything is going very well, even if the reality is completely different. Moreover, in the IT sector, I believe that an Indian CEO wouldn’t really spark much passion in the top professionals IBM needs in its ranks.

The company’s split within the next year or two also pretty certainly means that the next couple of years will be spent entirely focusing on how to split the company vs. investing in growth. Somehow, this just reminds me so much of Nokia, which I wouldn’t touch with a ten-foot pole. There would still be a lot of potential, but somehow IBM, like Nokia, manages to mess up a lot. I mainly bought this initially due to its favorable valuation and with the angle that the AI side would develop well. But apparently, commercially, nothing much has come out of that AI, even though there would be enormous potential, especially in the healthcare sector.

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As counter-arguments, the CEOs of Google and Microsoft are also of Indian origin and studied in the US, like this IBM guy.

I agree that if IBM had to reinvent itself, it would probably need new, more dynamic leadership for that job (and not a senior who has learned the ways of the house for 30 years). I haven’t checked what kind of board IBM has, but the change would surely have to come from there.

Your comparison to Nokia is relevant in that both cases might have been a bit self-sufficient. It hasn’t been long since I exchanged a few words with an IBM sales director, and a certain degree of arrogance was the best feeling to describe their faith in their own product. This is, of course, just a single observation.

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I have a hunch that Arvind is a transitional solution and the CEO chair is being prepared for RedHat’s ex-CEO Jim Whitehurst. So, let’s give the new CEO time to step into his position and get to know the company.

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Some bearish analysis on Seeking Alpha:

https://seekingalpha.com/article/4397463-ibm-is-value-trap

https://seekingalpha.com/article/4397172-quit-wasting-your-time-ibm

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IBM released its Q4 results after market close on Thursday, January 21. The results were (once again) a disappointment to the market, especially regarding revenue, which decreased by 8% year-over-year. Revenue declined across all business units, including Cloud & Cognitive Software, which includes Red Hat and IBM’s own public cloud (IBM Cloud). Earnings per share were better than market expectations but still fell by -56% compared to last year, partly due to significant expense provisions related to restructuring.

During the earnings call, new CEO Arvind Krishna, who started last year, hinted at “mid-single-digit” revenue growth starting from the end of the current year (once GTS IS is spun off as a separate company). The market was not convinced, and the stock price fell by -10% in Friday’s trading.

Summary:

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Cloud & Cognitive Software (public cloud, Hybrid Cloud solutions, software):

  • Transactional Processing Platforms (=traditional software) dropped by -26%. Although Red Hat is growing at a rate of 17%, it is by no means enough to compensate for even unit-level decline.

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Global Business Services (consulting):

  • consulting took a significant hit in 2020 as customers scaled back and shifted projects due to the pandemic. Revenue growth would require taking market share from Accenture, Indian companies, and above all, more agile smaller players.

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Systems (hardware and operating systems):

  • a highly cyclical business, revenue fluctuates strongly with the change of IBM z-hardware generations. z14 sales are dropping, and z15 sales will only start to show in 2021 figures.

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Global Technology Services (traditional infrastructure services):

  • for a long time the largest unit by revenue, which, with the exception of the TSS part, will be spun off as a separate listed company (NewCo). A downward trend for a long time.

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https://www.bloomberg.com/news/articles/2021-02-08/palantir-teams-up-with-ibm-opening-path-to-expanded-sales-staff

I posted the same link in the Palantir thread, but it’s probably of interest here too:

Palantir Technologies Inc. and International Business Machines Corp. are uniting in a partnership that will dramatically expand the reach of Palantir’s sales force while making IBM’s own artificial-intelligence software easier for non-technical customers to use, the companies plan to announce Monday.

Without providing a time frame, [IBM representative Rob] Thomas said he expects the partnership to help boost IBM’s customers using AI to 80% from its current 20%.

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I just noticed this thread and got excited to read it, because I invested in SAP at the end of January with a similar turnaround in mind. Although the companies’ offerings are probably a bit different, cloud solutions are likely a critical part of the success of the turnaround for both.

It will be interesting to see which one succeeds better, IBM or SAP, founded by its former employees. Having recently familiarized myself with IBM, I am still quite happy to be on the Germans’ bandwagon.

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It’s great to find a thread about IBM, and specifically a comment about this quantum computer issue. I don’t quite understand why one only hears negative things about IBM. BP just made a big deal with IBM about leveraging quantum computing in the energy sector to reduce carbon emissions. If I understood correctly, IBM apparently has the most quantum computing capacity to offer and seems to be a pioneer in this matter. Does the original poster or other members of the thread have more information about this?

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Ibari is well-positioned in terms of quantum machines, but the problem is that everything else (99%) of its core business has been poorly managed for the past 20 years. The company failed to innovate, operated too rigidly, and didn’t understand the importance of new modern technology.

Essentially, they focused on destroying company value by cutting development and concentrating on the wrong things. Growth stopped dead in its tracks. Now other tech giants have surpassed them, and they are so far behind in areas like cloud services and leveraging AI that they can’t possibly catch up.

The only salvation is to invent some new disruptive business that would make the company successful, but unfortunately, there’s no money or agility for that. A good example is the recent Palantir collaboration. They have to form alliances just to remain somewhat relevant in the current market.

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According to some sources, IBM’s Blockchain business, which has been one of its strategic focus areas, is also in trouble and resources there were radically cut back at the end of last year:

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The health business didn’t take off either:

https://www.wsj.com/articles/ibm-explores-sale-of-ibm-watson-health-11613696770

IBM is exploring a potential sale of its IBM Watson Health business, according to people familiar with the matter

The company spent billions buying up a collection of health-related businesses that are now part of IBM Watson Health, with the aim of combining them into a vast store of patient data and applying algorithms to extract useful insights.

While the effort made strides in areas including oncology and genomics, it never became the cohesive business IBM envisioned and has lost key executives in recent years.

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IBM’s divested infrastructure services business (GTS) has been named Kyndryl:

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IBM grew its revenue in every business area. :slight_smile:

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Below is CNBC’s article on IBM’s earnings:

  • IBM surpassed estimates on the top and bottom lines and ended 2023 with more free cash flow than it had projected.
  • The tech and services provider plans to buy two software assets during the quarter.
  • The distributed infrastructure category in particular, containing servers with IBM’s Power chips, accelerated to 8% growth.

With respect to guidance, IBM said it sees $12 billion in 2024 free cash flow and revenue growth in the mid-single digits at constant currency. “As we start the year, I think it’s prudent to assume the low end of that model,” Kavanaugh said on the conference call.

https://www.cnbc.com/2024/01/24/ibm-q4-earnings-report-2023.html

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