Be Cautious on IBM Stock Until After Whitehurst’s Resignation Shakes Out
My view of IBM (NYSE:IBM) stock is quite mixed right now. The tech giant’s cloud business has rebounded under its new CEO, Arvind Krishna, but my positive thesis on IBM stock has a second component: the strong management and sales skills of Jim Whitehurst, the former CEO of the highly successful start-up Red Hat.
In 2019, IBM acquired Red Hat. For two years after the deal, Whitehurst remained CEO of Red Hat, before being named president of IBM and Krishna’s number two.
Whitehurst’s elevation came in conjunction with the announcement of Krishna’s promotion to CEO in January 2020.
Earlier this month, IBM announced that Whitehurst was stepping down as president immediately and would leave the company in a few months. I think that is probably bad news for Big Blue as well as for the owners of IBM stock.
In my February 2020 column on IBM, I called Krishna a Technology and Cloud Genius who would know the best ways to improve IBM’s cloud offerings and predicted he would emulate Satya Nadella’s stupendous turnaround at Microsoft (NASDAQ:MSFT).
Less than 18 months into his tenure, Krishna (who officially took over as CEO in April 2020) has already started to turn around Big Blue.
Another InvestorPlace columnist, Mark R. Hake, noted that the company produced stellar first-quarter earnings and emphasized that the company’s earnings from cloud-based software are on a clear recurring growth path.
IBM’s sales soared 21% year-over-year, while Red Hat’s sales had jumped 17% YOY. The company’s free cash flow margin was 12.4%, which is nothing to sneeze at.
Meanwhile, IBM stock has climbed meaningfully since the company promoted Krishna and Whitehurst. The shares are up about 15%.
Whitehurst’s Absence and IBM Stock
In my February 2020 column on IBM I called Whitehurst a great rainmaker and manager. I predicted that he would greatly improve the company’s overall performance using the same techniques he incorporated at Red Hat.
The odds are high that Whitehurst has played a significant role in IBM’s recent success. As a result, his departure could meaningfully hurt the company’s performance going forward, particularly when it comes to running Red Hat and developing marketing and sales strategies.
On the other hand, I think that other talented executives at Big Blue could step up and adequately fill Whitehurst’s shoes, and the company is still being led by Krishna, who already has turned around its cloud business.
What’s more, I continue to believe that Krishna can revitalize IBM to the same extent that Microsoft CEO Satya Nadella has turned around that tech giant.
Also positive is that Whitehurst’s departure does not suggest that anything is wrong with IBM. In an interview with Barron’s after his departure was announced, the executive told Barron’s that he was leaving because he wanted to lead a company again, and he did not think he would get that chance at IBM.
The Bottom Line on IBM
In the wake of Whitehurst’s departure, my view on IBM stock has basically gone from “buy” to “hold.”
I believe that the company will likely continue to perform well over the longer term, but I worry that it could hit some serious speed bumps after Whitehurst departs.
Therefore, I think that those longer-term investors who already have held onto IBM stock for a while and have a profitable position can retain all or most of their shares, but I would wait before putting new money to work in the name.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.
