Still Living in the Past, IBM Remains Behind the Tech Ball
To make a comparison to football, IBM (NYSE:IBM) is the Dallas Cowboys of technology. How do I mean? Well, both IBM and the Cowboys are overrated. They haven’t won a title in a quarter century and they’re not going to do it this year. Their system is stale, yet somehow they still have fans. All around, IBM stock represents a disappointment.
Basically, both the Cowboys and IBM are living in the past. The Cowboys revere football icon Tom Landry while actually being run by Jerry Jones. Similarly, IBM still reveres its 20th century leaders while still feeling the effects of former CEO and current executive chairman Virginia Rometty.
This much became clear when Jim Whitehurst, who brought IBM a new cachet with Red Hat in 2019, announced his departure. Rometty and the IBM bureaucracy outmaneuvered him, installing Arvind Krishna as CEO. Now, the company is still behind the ball.
IBM Stock: Rometty’s Bad Plays
Rometty — who became CEO in 2012 after a career in marketing — compiled one of the worst executive records of the last decade in my opinion.
For starters, like Randall Stephenson of AT&T (NYSE:T), she prioritized the dividend and missed the cloud — a trillion-dollar opportunity. Additionally, like Jeff Immelt of General Electric (NYSE:GE), she covered up poor performance with happy talk and buybacks. Then finally, like Brian Krzanich of Intel (NASDAQ:INTC), Rometty ran off talent until the cupboard was bare.
When I was young, IBM dominated technology just like the Cowboys dominated football. They literally made Microsoft (NASDAQ:MSFT) and used it to crush Apple (NASDAQ:AAPL) in PCs. Their style was to bring in suits who assured clients they could handle all of their computing. Their Jimmy Johnson (another football icon) was Lou Gerstner, who made IBM a consulting company. Gerstner even wrote a book about it called Who Says Elephants Can’t Dance.
Whitehurst also has a book, The Open Organization, which describes how successful companies today must be run from the bottom-up as much as the top-down. Tech companies must also be partners with their customers, Whitehurst notes, not their overlords. The book was a direct challenge to the way IBM does business.
When the company bought Red Hat, I was ready to buy IBM stock, thinking it would mark a transformation. However, Rometty and others have shown that’s not happening.
Why IBM Looks Good
Of course, IBM stock still looks good right now because everything in tech looks good. Today, shares are up 12% year-to-date (YTD) and have paid out $3.27 per share in dividends. The second-quarter earnings looked good as well. Now, investors are hoping that, by spinning off its services business as Kyndryl, IBM can be great again.
But that’s not going to happen. Kyndryl has signed an expensive lease atop One Vanderbilt. It’s a sales office, meant to over-awe clients with its power. That’s the IBM way. But Kyndryl is just an outsourcer like Cognizant (NASDAQ:CTSH), which has also gone nowhere this year.
And the rest of IBM? It will be a minnow among giants. Dell (NYSE:DELL), which is similar to the company and owns most of VMWare (NYSE:VMW), is up 31% YTD. Likewise, Oracle (NYSE:ORCL) — the faux cloud company that Silicon Valley loves to hate — is up 39% YTD.
Of course, the “hybrid cloud” is a great idea, but IBM can’t execute on it. After all, Dak Prescott is also a good quarterback, but that doesn’t mean he can carry the team.
The Bottom Line on IBM Stock
If one word can be used to describe IBM today, it’s Watson.
Watson was named for the company’s legendary CEOs, Tom Watson Sr. — who created IBM — and Tom Watson Jr., who made IBM a computer company. It was supposed to become a dominant artificial intelligence (AI) engine.
In the end, though, Watson was just Apache Hadoop with a fancy front-end. Hadoop was an interesting idea, but a business failure.
When it comes down to it, IBM needs to be recycled, like its old upstate New York manufacturing plants need to be recycled. My guess is that it will be, after the company has flailed a bit as this latest incarnation. Its cloud will become a real estate investment trust (REIT) like Equinix (NASDAQ:EQIX) and Red Hat will be spun out on its own. Retirement liabilities will be made to disappear.
But IBM won’t be taken out for nearly the $126 billion it’s worth today. That’s because, in my opinion, Virginia Rometty has become the Jerry Jones of technology. She’ll win eight games and lose eight games, then call it a success. Consider that before investing in IBM stock.
On the date of publication, Dana Blankenhorn held long positions in MSFT and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn?has been a financial journalist since 1978. His latest book is?Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at?@danablankenhorn.
