IBM - International Business Machines

[hyten1]

IBM reminds me of WDC/STX

 

the HD will be obsolete, the new technology will run circle around it, WDC/STX will die a quick death. we all know what happened and what is happening.

 

i think everyone knows cloud is the future, but automatically jump from cloud is the future to AMZN will kill everybody is premature, reality is more complicated than that. corporate IT is more complicated than that, the industry is more complicated than that.

 

hy

[scorpioncapital]

I think this "not chasing after revenue growth" is a straw man. I think most critics of IBM, including myself get that IBM is trying to become smaller and shed business units, which will hurt revenue growth. The main reason people don't like IBM is because they don't feel it will be technologically and commercially relevant in the future, not because of the lack of revenue growth. If this line of reasoning is correct, repurchasing shares is not going to solve the problem.

 

Anyways, what is the target return that longs have here?

 

Can we invert this question and talk about the return potential from the short side with IBM $ 133/share? I'm serious, would like to hear from anyone short IBM---what should IBM be worth?

 

I'm not short IBM, but the short case for IBM is simple. 

 

The technologies and services that IBM has been so successful selling to the Fortune 500 is a rapidly shrinking market.  GE, Coke, John Deere, BMW, Capital One and others have all publicly announced they are eliminating the majority of their datacenters and moving to the public cloud (primarily Amazon).  Each of those datacenters is currently full of very expensive hardware, software and services that have been purchased from IBM, EMC, Cisco, Oracle and other traditional Fortune 500 IT providers.  This move to the cloud will substantially reduce Fortune 500 spend among the traditional IT providers and put them at risk of joining the long list of premiere technology firms that were made obsolete (DEC, Sun, Silicon Graphics, etc).

 

And that's probably why IBM has the foreign currency headwind - it does like 80% of it's business outside the US, where it can actually still compete. Maybe it's a play on modernization of the world ex-US.

 

 

[NomadicRiley]

IBM reminds me of WDC/STX

 

the HD will be obsolete, the new technology will run circle around it, WDC/STX will die a quick death. we all know what happened and what is happening.

 

i think everyone knows cloud is the future, but automatically jump from cloud is the future to AMZN will kill everybody is premature, reality is more complicated than that. corporate IT is more complicated than that, the industry is more complicated than that.

 

hy

 

No one knows if the scenario I described above will occur or not - someone ask for the "case to be short IBM" and that is what I described. 

 

Yes - corporate IT is complicated, but that doesn't mean that Amazon is not taking substantial market share from the large companies I mentioned above.  AWS is growing at over 80% YoY (currently ~$7+ billion) while IBM, Oracle, EMC and Cisco are all reporting either low single digit revenue growth or shrinking revenues. 

 

What makes this scenario even more difficult for the incumbents is the cost savings Fortune 500 firms are seeing by moving to the cloud.  Even if IBM can keep all their existing clients, just transition them from installed instances to the IBM cloud - the per client spend will decrease substantially leaving a huge revenue hole that needs to be filled.

 

[Jurgis]

the HD will be obsolete, the new technology will run circle around it, WDC/STX will die a quick death. we all know what happened and what is happening.

 

This is hyperbole and not helpful. Nobody seriously believes death of HDDs. However, it might have low or negative growth that makes WDC/STX subpar investments. I could write more, but this is not WDC/STX thread.

[hyten1]

jurgis let me clarify, i am not refering to wdc/stx of today, i am refering to wdc/stx just a few years ago when the stock was plunging, there were tons of talk/article about the end of HD.

 

 

[Jurgis]

jurgis let me clarify, i am not refering to wdc/stx of today, i am refering to wdc/stx just a few years ago when the stock was plunging, there were tons of talk/article about the end of HD.

 

To keep this on topic: Nobody seriously believes death of IBM within 10 years or so. However, it might have negative growth that makes IBM subpar investment.

[vinod1]

 

GE, Coke, John Deere, BMW, Capital One and others have all publicly announced they are eliminating the majority of their datacenters and moving to the public cloud (primarily Amazon).

 

I know for a fact that you are wrong on one of the companies from direct first hand experience. If anyone proposed that at this company they would laughed out of the room. I know because I used to manage the process at this company for reviewing and approving Target Architectures, under which such decisions would fall under. The company in question is a making a substantial investment in private cloud.

 

Vinod

[KCLarkin]

The technologies and services that IBM has been so successful selling to the Fortune 500 is a rapidly shrinking market.

 

This is the narrative but is it true?

 

Over the last 3 years, the constant currency revenue decline for IBM is -2%, -1%, -1%. That is a very slow decline. IBM paid out ~100% of FCF, so there is no reason to expect much growth. Those revenue declines are largely due to market share erosion, not industry headwinds. The other names you mentioned are all growing.

 

Now, the market is clearly predicting that IBM will decline rapidly. But the market has a mixed track record with these predictions.

 

Anyway, I've had this debate on this thread numerous times so I won't get into detail. But I will re-iterate that they have a portfolio of "strategic imperatives" with approximately $30 billion in revenue growing 30% YoY at constant currency. Salesforce.com is growing at a similar rate and trades for 8x sales.

 

But, as you say, the short case is simple. The long case is more nuanced.

[hyten1]

i agree generally with what you said, but it all comes down to details.

 

yes i agree the cloud will probably save money for the clients, which result in less revenue for IBM, but remember it also probably means less cost for IBM (less consultants, less hardware etc.) and transitioning current IT infrastructure/app cost money and time (who will help the client do this?). transitioning these IT infrastructure/app is very complicated and time consuming.

 

jurgis you are right using the words "death", "the end" is too much, yet that is how many people feel/think.

 

slow growth or negative growth, yes, which is the same for HD.

 

hy

 

IBM reminds me of WDC/STX

 

the HD will be obsolete, the new technology will run circle around it, WDC/STX will die a quick death. we all know what happened and what is happening.

 

i think everyone knows cloud is the future, but automatically jump from cloud is the future to AMZN will kill everybody is premature, reality is more complicated than that. corporate IT is more complicated than that, the industry is more complicated than that.

 

hy

 

No one knows if the scenario I described above will occur or not - someone ask for the "case to be short IBM" and that is what I described. 

 

Yes - corporate IT is complicated, but that doesn't mean that Amazon is not taking substantial market share from the large companies I mentioned above.  AWS is growing at over 80% YoY (currently ~$7+ billion) while IBM, Oracle, EMC and Cisco are all reporting either low single digit revenue growth or shrinking revenues. 

 

What makes this scenario even more difficult for the incumbents is the cost savings Fortune 500 firms are seeing by moving to the cloud.  Even if IBM can keep all their existing clients, just transition them from installed instances to the IBM cloud - the per client spend will decrease substantially leaving a huge revenue hole that needs to be filled.

[NomadicRiley]

 

GE, Coke, John Deere, BMW, Capital One and others have all publicly announced they are eliminating the majority of their datacenters and moving to the public cloud (primarily Amazon).

 

I know for a fact that you are wrong on one of the companies from direct first hand experience. If anyone proposed that at this company they would laughed out of the room. I know because I used to manage the process at this company for reviewing and approving Target Architectures, under which such decisions would fall under. The company in question is a making a substantial investment in private cloud.

 

Vinod

 

Vinod,

 

I don't doubt your first hand experience but all of those companies have made very recent public pronouncements supporting the public cloud. 

 

(Anyone interested in IBM should read this article)

 

Coca-Cola: http://www.v3.co.uk/v3-uk/analysis/2433360/web-summit-coke-cto-shuns-ibm-dell-and-hp-to-go-with-tech-startups?utm_source=Twitter&utm_medium=Social&utm_campaign=Twitterfeed&utm_content=Madeline_V3

 

"We've moved from doing everything internally to cloud-first. I don't mean in a private cloud; I mean in a public cloud."

 

"The history of IT was very linear. We would always rely on Big Blue [iBM], HP, Dell, the major corporations and they could provide us with that vision for the future. We were getting this from the analysts - the Gartners, Forresters and others. Again we can't do that anymore - the world is changing too quickly. We have to be able to curve and swerve through point A to point C."

 

GE / Capital One / John Deere / BMW executives all presented in the AWS Re:Invent Keynote last month in Vegas and proclaimed they were moving ever increasing amounts of infrastructure to AWS.

 

http://www.zdnet.com/article/ge-capital-one-give-aws-the-rub-at-reinvent/#!

 

http://www.networkworld.com/article/2991392/cloud-computing/3-takeaways-from-amazons-reinvent-cloud-conference.html

 

 

 

[vinod1]

 

GE, Coke, John Deere, BMW, Capital One and others have all publicly announced they are eliminating the majority of their datacenters and moving to the public cloud (primarily Amazon).

 

I know for a fact that you are wrong on one of the companies from direct first hand experience. If anyone proposed that at this company they would laughed out of the room. I know because I used to manage the process at this company for reviewing and approving Target Architectures, under which such decisions would fall under. The company in question is a making a substantial investment in private cloud.

 

Vinod

 

Vinod,

 

I don't doubt your first hand experience but all of those companies have made very recent public pronouncements supporting the public cloud. 

 

(Anyone interested in IBM should read this article)

 

Coca-Cola: http://www.v3.co.uk/v3-uk/analysis/2433360/web-summit-coke-cto-shuns-ibm-dell-and-hp-to-go-with-tech-startups?utm_source=Twitter&utm_medium=Social&utm_campaign=Twitterfeed&utm_content=Madeline_V3

 

"We've moved from doing everything internally to cloud-first. I don't mean in a private cloud; I mean in a public cloud."

 

"The history of IT was very linear. We would always rely on Big Blue [iBM], HP, Dell, the major corporations and they could provide us with that vision for the future. We were getting this from the analysts - the Gartners, Forresters and others. Again we can't do that anymore - the world is changing too quickly. We have to be able to curve and swerve through point A to point C."

 

GE / Capital One / John Deere / BMW executives all presented in the AWS Re:Invent Keynote last month in Vegas and proclaimed they were moving ever increasing amounts of infrastructure to AWS.

 

http://www.zdnet.com/article/ge-capital-one-give-aws-the-rub-at-reinvent/#!

 

http://www.networkworld.com/article/2991392/cloud-computing/3-takeaways-from-amazons-reinvent-cloud-conference.html

 

Thanks for the response and the links.

 

It is telling that the comments about moving completely to cloud are coming from Coke. From an IT perspective it is a glorified lemonade stand. What happens if something goes wrong with its data? A case of Coca Cola would end up in the wrong restaurant?

 

Some of the comments from the coke executive speak for themselves:

 

"Now we're looking at things like face recognition, so the machine recognises you and you can have a relationship with the machine. All of this is data, all of this has to be analysed in real time, we need to know what you like and don't like, and it all has to go through the cloud."

 

There is a huge difference between regulated and/or mission critical companies in the finance, health or transportation industries and companies like Coke which although large, have relatively low impact IT operations.

 

If you are a large bank auditability and data security becomes important. So you need to be able to not just have the right data but to prove to your regulator that the data is not modified and you do that by having various controls in place, logging every change, modification down at the device level. If not, it would deemed as "control weakness" with all the associated impact on capital allocation. This might look simple from the outside, but companies spend money in the hundreds of millions of dollars to do just this. So many of the critical applications are not moving to the public cloud.

 

The executive you referenced told the literal truth but it does not mean what you think it means. I can PM you more details but do not want to publicize it.

 

Or take Visa company for example. They process 30,000 or 40,000 transactions per second and they are a pretty big IBM shop. None of this is going to be available "as a service" on the public cloud anytime soon.

 

So there are areas which are not moving to the public cloud in the foreseeable future. Others have covered pretty well which areas are moving to cloud and where AWS plays a role.

 

Vinod

[vinod1]

What makes this scenario even more difficult for the incumbents is the cost savings Fortune 500 firms are seeing by moving to the cloud.  Even if IBM can keep all their existing clients, just transition them from installed instances to the IBM cloud - the per client spend will decrease substantially leaving a huge revenue hole that needs to be filled.

 

You are assuming that the cost savings means less revenue for IBM. We do know that total IT spend (in constant currency) is growing and anecdotally what I see is that most of the savings are funding other areas - mobile, security, analytics - for many companies. If you see individual companies IT spend, they are not shrinking for many of the companies - anecdotal.

 

IBM is focusing on these areas and most of the acquisitions in the last 3 years are in this space.

 

Vinod

[LowIQinvestor]

Quote from: LowIQinvestor on November 12, 2015, 09:51:04 AM

Quote

I think this "not chasing after revenue growth" is a straw man. I think most critics of IBM, including myself get that IBM is trying to become smaller and shed business units, which will hurt revenue growth. The main reason people don't like IBM is because they don't feel it will be technologically and commercially relevant in the future, not because of the lack of revenue growth. If this line of reasoning is correct, repurchasing shares is not going to solve the problem.

 

Anyways, what is the target return that longs have here?

 

Can we invert this question and talk about the return potential from the short side with IBM $ 133/share? I'm serious, would like to hear from anyone short IBM---what should IBM be worth?

 

I'm not short IBM, but the short case for IBM is simple. 

 

The technologies and services that IBM has been so successful selling to the Fortune 500 is a rapidly shrinking market.  GE, Coke, John Deere, BMW, Capital One and others have all publicly announced they are eliminating the majority of their datacenters and moving to the public cloud (primarily Amazon).  Each of those datacenters is currently full of very expensive hardware, software and services that have been purchased from IBM, EMC, Cisco, Oracle and other traditional Fortune 500 IT providers.  This move to the cloud will substantially reduce Fortune 500 spend among the traditional IT providers and put them at risk of joining the long list of premiere technology firms that were made obsolete (DEC, Sun, Silicon Graphics, etc).

 

Yes, I understand the simplistic short thesis- Amazon will win all cloud business. IBM's hybrid cloud can't compete.

But what is IBM worth today based on that assumption!? Is this a terminal short that goes to zero? At what price is this a terrible short?

 

[dbuch]

I think another way to think about it is what would equity be today if you add back all dividends and stock repurchases over the years. If I start in 2001 at $23B and add back all cash paid out, equity would be $177B at the end of 2014. That's about a 17% growth rate. They decided the best use of the cash was to buyback stock or pay shareholders dividends as opposed to acquiring companies that may have lower returns on investment. They probably could have easily spent $100B on acquisitions over the years and be a much larger business, but the value per share would have likely been less.

[KCLarkin]

What makes this scenario even more difficult for the incumbents is the cost savings Fortune 500 firms are seeing by moving to the cloud.  Even if IBM can keep all their existing clients, just transition them from installed instances to the IBM cloud - the per client spend will decrease substantially leaving a huge revenue hole that needs to be filled.

 

There is a deflationary paradox with IT. The cost per x is always falling. But total IT spending rises faster than GDP.

 

The mainframe is an interesting example. Mainframe market share has rapidly eroded from successive waves of UNIX, PC, Linux, x86, virtualization, cloud. Yet, IBM's mainframe revenue remains fairly stable. Many people assume that the mainframe is like cigarettes -- unit sales are falling but IBM keeps raising prices for the few remaining mainframe addicts. Actually, the opposite is true. The amount of processing done on IBM mainframes is growing rapidly but the price-performance is dropping just as fast.

 

Now, it is possible that "this time is different" and public cloud will really shrink total IT spend. But there is also a compelling argument that the public cloud will unleash an enormous increase in total IT usage resulting in a modest increase in overall IT spending.

 

---

 

Last year (2013), the company sold 2,700 mainframes for $4.3 billion in revenue, according to IDC. That was up from 2,300 systems and $4 billion in 2002

[Spekulatius]

Still, for really long-term investors, consider this: If you had bought a share of IBM when it first listed on the NYSE at $47, you would now own 11,879 shares with a value of $1.6-million, according to the company. That’s a 3.4 million per cent return.

 

Compound growth in stocks is like this. Thus, when someone naively projects what a single share that was bought at IPO would be worth now, it is natural for them to guess low. So--to join the dots for you, this is the expectation part. Their expectation is likely low.

 

But then they're told that the value is actually high!  Surprise!  There is an incongruence between what they expected, and what is actually true! 

 

See?  Fun!

 

What's more, it's even better than that!  Like any great story, there's also a good underlying message. In this case, the message is, "if you allow investments to grow tax free over a really long time, compounding even a small investment will make you rich."

 

Hopefully that's clear enough for you to understand, because it's quite a useful concept, one I think you'll find applies to many fun things in the future!

 

Compound growth is amazing when it works and there actually is growth, but in a lot of cases something bad happens along the way. The owners of Sperry Rand, Burroughs, Control Data, Wang Computer, Prime Computer and Digital Equipment did not get that rich if they held on.

 

If the native Americans selling Manhattan in 1626 had invested the $24 received with an 8% return, they would now have 118 billion dollar, which is not too bad. I doubt many have been able to get such a return over 290 years compounded.

[RadMan24]

Any thoughts on risk/reward strategy on adding to long position with two year leaps?

[portfolio14]

The technologies and services that IBM has been so successful selling to the Fortune 500 is a rapidly shrinking market.  GE, Coke, John Deere, BMW, Capital One and others have all publicly announced they are eliminating the majority of their datacenters and moving to the public cloud (primarily Amazon).

 

(A general comment about the public cloud ideology, not specifically towards IBM.)

 

Stop for a moment and consider how fragile (in Taleb's sense) the world will become with this currently trend/thinking of moving things to public cloud. (Your DR systems which will also be on the cloud may just turn out to be the portfolio insurances in the 80s.)

 

I'm pretty sure smart executives of companies with mission critical systems are aware of the risk. But whether they can resist the temptation of cost saving is a different story.

[Palantir]

So...naturally the question is, how much of IBM's revenue is from "mission critical" services?

[NomadicRiley]

 

Thanks for the response and the links.

 

It is telling that the comments about moving completely to cloud are coming from Coke. From an IT perspective it is a glorified lemonade stand. What happens if something goes wrong with its data? A case of Coca Cola would end up in the wrong restaurant?

 

Some of the comments from the coke executive speak for themselves:

 

"Now we're looking at things like face recognition, so the machine recognises you and you can have a relationship with the machine. All of this is data, all of this has to be analysed in real time, we need to know what you like and don't like, and it all has to go through the cloud."

 

There is a huge difference between regulated and/or mission critical companies in the finance, health or transportation industries and companies like Coke which although large, have relatively low impact IT operations.

 

If you are a large bank auditability and data security becomes important. So you need to be able to not just have the right data but to prove to your regulator that the data is not modified and you do that by having various controls in place, logging every change, modification down at the device level. If not, it would deemed as "control weakness" with all the associated impact on capital allocation. This might look simple from the outside, but companies spend money in the hundreds of millions of dollars to do just this. So many of the critical applications are not moving to the public cloud.

 

The executive you referenced told the literal truth but it does not mean what you think it means. I can PM you more details but do not want to publicize it.

 

Or take Visa company for example. They process 30,000 or 40,000 transactions per second and they are a pretty big IBM shop. None of this is going to be available "as a service" on the public cloud anytime soon.

 

So there are areas which are not moving to the public cloud in the foreseeable future. Others have covered pretty well which areas are moving to cloud and where AWS plays a role.

 

Vinod

 

I used to hold the same beliefs your describing about companies being reluctant to move mission critical and highly regulated systems into the public cloud (I work in financial services).  But I then saw presentations from executives at both Nasdaq and FINRA describing how they were now storing virtually all their new data in the cloud (including accounting, transactions, etc). 

 

When asked about security their answers surprised me.  They said in addition to the obvious cost savings and increases in agility, they feel in the majority of cases their cloud environments are _more_ secure than their datacenters because of the tools that allow them to know with 100% certainty every server, service and app running in their cloud infrastructure and have full audit-able transaction logs of every access to each system. 

 

I was frankly shocked the first time I heard an executive say they felt the cloud was more secure than an onsite install.  But I've now heard it many times from many different firms and it has substantially impacted my thinking of how big of threat the cloud could be to enterprise IT and in what timeframe.

 

 

[KCLarkin]

Are they storing transaction logs in the cloud or processing transactions in real-time?

[arcube]

Interesting piece.

http://mobile.nytimes.com/2015/11/15/business/ibms-design-centered-strategy-to-set-free-the-squares.html

[vinod1]

 

Thanks for the response and the links.

 

It is telling that the comments about moving completely to cloud are coming from Coke. From an IT perspective it is a glorified lemonade stand. What happens if something goes wrong with its data? A case of Coca Cola would end up in the wrong restaurant?

 

Some of the comments from the coke executive speak for themselves:

 

"Now we're looking at things like face recognition, so the machine recognises you and you can have a relationship with the machine. All of this is data, all of this has to be analysed in real time, we need to know what you like and don't like, and it all has to go through the cloud."

 

There is a huge difference between regulated and/or mission critical companies in the finance, health or transportation industries and companies like Coke which although large, have relatively low impact IT operations.

 

If you are a large bank auditability and data security becomes important. So you need to be able to not just have the right data but to prove to your regulator that the data is not modified and you do that by having various controls in place, logging every change, modification down at the device level. If not, it would deemed as "control weakness" with all the associated impact on capital allocation. This might look simple from the outside, but companies spend money in the hundreds of millions of dollars to do just this. So many of the critical applications are not moving to the public cloud.

 

The executive you referenced told the literal truth but it does not mean what you think it means. I can PM you more details but do not want to publicize it.

 

Or take Visa company for example. They process 30,000 or 40,000 transactions per second and they are a pretty big IBM shop. None of this is going to be available "as a service" on the public cloud anytime soon.

 

So there are areas which are not moving to the public cloud in the foreseeable future. Others have covered pretty well which areas are moving to cloud and where AWS plays a role.

 

Vinod

 

I used to hold the same beliefs your describing about companies being reluctant to move mission critical and highly regulated systems into the public cloud (I work in financial services).  But I then saw presentations from executives at both Nasdaq and FINRA describing how they were now storing virtually all their new data in the cloud (including accounting, transactions, etc). 

 

When asked about security their answers surprised me.  They said in addition to the obvious cost savings and increases in agility, they feel in the majority of cases their cloud environments are _more_ secure than their datacenters because of the tools that allow them to know with 100% certainty every server, service and app running in their cloud infrastructure and have full audit-able transaction logs of every access to each system. 

 

I was frankly shocked the first time I heard an executive say they felt the cloud was more secure than an onsite install.  But I've now heard it many times from many different firms and it has substantially impacted my thinking of how big of threat the cloud could be to enterprise IT and in what timeframe.

 

I would not rely few blurbs in presentations made by very high executives to understand what is actually going on. I have already pointed out why at least at one company you are misunderstanding what was being said. What you are implying is vastly different from what is going on at that company.

 

In the second case you pointed to a Coke article where the executive talks all high flying language laced with buzzwords that does not say much.

 

At the same company I was referencing around 2005/2006 we had an new IT initiative that revamped the operational processes of how applications are designed and rolled out. Let us call this process "Super Duper Process". It was rolled out across the company and all IT projects were to follow this process. A friend of mine was heading the knowledge management effort based on Open Text software called Livelink. Business came to him on an urgent project that they need very quickly. My friend's agreed to meet the time with one condition - that the project should be exempted from following the new "Super Duper Process" and that business get this exception. They did get the exception and the project was delivered per schedule.

 

A few months later the CIO at that time was meeting with small groups of IT employees at various sites and when he came to our site, both me and my friend who did the project above attended the meeting. In it the CIO highlighted the project my friend did as an example of what can be achieved by using the new "Super Duper Process". My friend and I looked at each other to see if we are understanding this correctly. As mentioned the project was delivered only because he did not have to follow the new "Super Duper Process". Here the CIO was saying the exact opposite. Black is white.

 

Maybe I am unfairly biased due to this, but I am always skeptical of what some high level executive says especially about deeply technical issues. I apply the same skepticism to Ms. Rometty. I have not seen anything that convinces me that she knows what she is talking about and vice versa.

 

I prefer to do more on the ground scuttlebutt. Talking with IT people at various banks is more helpful. Not just their opinions but what is actually going on in the ground and then make up your own mind.

 

When I am investing in BAC, I took my home loan from them. Even though they quoted me a higher rate and put numerous issues, it provided me with an opportunity to talk with various back office people and get a picture of the inside. I also talked with lots of employees and contractors who worked there. It painted a picture of how inefficient they are but also how incredibly conservative they become in their underwriting. I found this kind of research more helpful then relying on say high level presentations. More importantly the financials are matching up with the scuttlebutt research.

 

Please do not think I am just retrenching into my position and defending my thesis. I am going to do a bit more scuttlebutt as well.

 

Vinod

[sleepydragon]

http://mobile.nytimes.com/2015/11/15/business/ibms-design-centered-strategy-to-set-free-the-squares.html

[LowIQinvestor]

Great article about AWS

Amazon's AWS: The Myth Of Scale And First Mover Advantage

http://seekingalpha.com/article/3686256?source=ansh

 

Summary

 

The scale of AWS.

 

Data residency laws in Europe.

 

Scale as a competitive advantage is usually a local game.