IBM Train Wreck Continues Ahead of Earnings

IBM (NYSE: IBM) has continued to sell a turnaround, driven by its cloud and artificial intelligence businesses. Ahead of second quarter earnings, however, investors have not bought the pitch.

IBM shares are off 7% this year, to $154. Arguably it closest competitor is Microsoft (NASDAQ: MSFT). Its shares are up 17% to $73. Wall St. has gained confidence in Microsoft’s case as a dominant force in the cloud sector.

The most recent attack on IBM’s prospects is an analysis from investment banking firm Jefferies. In a sharply negative report, analyst James Kisner wrote that the company’s run at the cloud has and will be underwhelming:

Our analysis and conversations with industry contacts suggest that while IBM offers one of the more mature and broad cognitive computing platforms today, the hefty services component of many AI deployments will be a hindrance to adoption. We also believe, based on our analysis, that IBM appears outgunned in the war for talent and will likely see increasing competition over time. Finally, our analysis suggests that IBM’s AI investments aren’t likely to be NPV positive. Reiterate Underperform.

He continued that “Watson,” the cloud and AI consulting face of IBM, has likely been a mediocre contributor to the company’s fortunes, at best. Otherwise, IBM would be proud enough of its performance to break out its finances, something IBM has refused to do despite Wall St. pressure to give details.

The proof of IBM’s success, or lack thereof, will be the financial results for its second quarter. Most investors believe it will be yet another quarter in which revenue fell year over year. Also, IBM will provide sketchy data on Watson and related businesses.

Among the most disturbing aspects of IBM’s failure is how CEO Virginia Marie “Ginni” Rometty has kept her job for over five years. That may change if IBM proves itself to be a financial failure again in the second quarter. At that point, she may lose her job. Certainly, a number of investors hope so. Then the company has a chance to pull itself from the wreckage of its current turnaround.

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