IBM Shares Drop 22% This Year as Hope of Turnaround Dims

Douglas A. McIntyre

Shares of International Business Machines Corp. (NYSE: IBM) are down 22% this year as hopes of a turnaround promised by CEO Ginni Rometty dissolve. She has been at the task since 2012 and has taken IBM through several reinventions.

Rometty recently bought Red Hat, a huge provider of open source software primarily for businesses. IBM paid $34 billion, which is an unusually high multiple of both earnings and revenue. The deal should bolster IBM’s cloud-related businesses Rometty argues, but investors appear to believe IBM made that case poorly.

Most weeks, IBM continues to punch out several press releases, which is unusual for publicly held companies. Among the most recent:

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Most have little to say about the financial effects of IBM’s plans. Many have to do with IBM’s cloud initiatives, an area in which the company needs to garner market share from leaders and Microsoft. Most research shows that IBM’s share of the market is a small fraction of its major competitors. IBM has not made a plausible case this will change, perhaps because there is none.

The largest knock against IBM is that it has not grown in years, based on revenue, while its primary competition has grown at double digits quarter after quarter. The market is still stinging from another drop in IBM’s revenue last quarter, down 2% to $18.8 billion. IBM said its cloud services brought in $19 million over the 12 months that ended in the recent quarter. It is hard to tease that number out from what IBM calls “strategic imperatives” so a comparison to results from other companies is hard to make.

What is not hard to assess is that revenue from market leader Amazon Web Services hit $6.7 billion last quarter, up 48% from the same period the year before. Its operating income margin was an extraordinary 31%.

IBM’s products and services have not been knit together in a way so that Wall Street can believe the company has a coherent strategy beyond grabbing at opportunities. One does not need to look at just the year-to-date stock price for evidence. As an aside, IBM’s shares are down 32% over five years, while the Nasdaq is higher by 74%.