Jurgis Posted July 9, 2015 Share Posted July 9, 2015 They look like airlines, but they hope to be more sticky. Some of them might be. It should be a sticky business. Changing core infrastructure in a company can be done, but its a pain in the ass and won't be done lightly. Note, I'm assuming that computing is a core business function to basically everyone. Right, I was thinking about cloud providers that provide commodity computing substrate (similar to domain providers (LAMP+)) vs. ones that provide custom solutions, guarantees, etc. Also something like Azure might not be easily provided by anyone else apart from Microsoft. Link to comment Share on other sites More sharing options...
Zorrofan Posted July 9, 2015 Share Posted July 9, 2015 IBM announces new chip breakthrough.... http://mashable.com/2015/07/09/ibm-7-nanometer-chip/ but they are still selling this division. Maybe this gets them a better price? cheers Zorro Link to comment Share on other sites More sharing options...
KCLarkin Posted July 9, 2015 Share Posted July 9, 2015 IBM announces new chip breakthrough.... http://mashable.com/2015/07/09/ibm-7-nanometer-chip/ but they are still selling this division. Maybe this gets them a better price? They sold the manufacturing facilities, not the design team. In industry jargon, they are now a "fabless" semiconductor company. Link to comment Share on other sites More sharing options...
portfolio14 Posted July 9, 2015 Share Posted July 9, 2015 I don't know that that is true -- that a shift to the cloud make IT a utility. A shift to the cloud obviates the needs to maintain and update your own servers, which is cap-ex intensive and difficult in its own right. But servers aren't the same as IT, you still need software (probably customized to your business) interaction with machines all over your business network. Maintaining servers is just one part of the value chain. Please help me to understand what cloud services IBM's trying to sell primarily. I thought IBM's (and other IaaP providers') message is: "move your system onto our cloud to lower your infrastructure/pumping capex." So, I'd imagine the custom app/software stack already exists. The capex to maintain this custom portion of the stack won't be different regardless it's running on a private server or on IBM's cloud. It's the capex to maintain the low-level infrastructure that IBM tells their customers they can save. Am I right? If so, isn't "maintaining servers" the business IBM is trying to get into? Isn't this the worst part of the value chain? Also, how is the cloud like airlines? Airplanes have lifespans over decades, server farms have to earn their cost much more quickly. Also, I don't think server usage is as price elastic as airplane tickets, or as subject to discretionary cutbacks during a business slowdown. If you're Target, you can't tell your employees to process less data when business is slow but you can tell people not to fly (i.e something like email and teleconferencing acts as an imperfect substitute). You can restructure your business to lower the expense, but it becomes like restructuring your business to use less electricity. Good points. Apparently my analogy isn't very adequate. Don't the cloud providers look like airlines? They look like airlines, but they hope to be more sticky. Some of them might be. It should be a sticky business. Changing core infrastructure in a company can be done, but its a pain in the ass and won't be done lightly. Note, I'm assuming that computing is a core business function to basically everyone. OK, if it's really sticky, that means "cloud will reduce the TCO" is an illusion to the customers. Being sticky means over time the vendors can raise prices. That means the low costs today to customers are only baits. Is that your view? Link to comment Share on other sites More sharing options...
Guest Schwab711 Posted July 9, 2015 Share Posted July 9, 2015 Nothing about cloud computing is "sticky". Just because it's annoying to move providers doesn't mean it won't be done if it makes economic sense. It's not like the CEO of a major bank is doing the conversion personally. The selling point of cloud services is that the provider's reputation in useless and price is the only factor. I'm sure IBM is hoping to get customers to pay a slight premium for the IBM guarantee (which may work). Overall revenue of the IT industry has to go down, ceteris paribus. I also think cloud hardware services will be extremely similar to airplane operators because the upfront investment cost of data centers is decreasing on a per computing power basis (just as new airplanes are better values than used ones). Other than permits/regulations, new data centers should have lower costs than existing ones which is going to destroy any profits above cost of capital. Link to comment Share on other sites More sharing options...
TheAiGuy Posted July 10, 2015 Share Posted July 10, 2015 Nothing about cloud computing is "sticky". Just because it's annoying to move providers doesn't mean it won't be done if it makes economic sense. It's not like the CEO of a major bank is doing the conversion personally. The selling point of cloud services is that the provider's reputation in useless and price is the only factor. I'm sure IBM is hoping to get customers to pay a slight premium for the IBM guarantee (which may work). Overall revenue of the IT industry has to go down, ceteris paribus. I also think cloud hardware services will be extremely similar to airplane operators because the upfront investment cost of data centers is decreasing on a per computing power basis (just as new airplanes are better values than used ones). Other than permits/regulations, new data centers should have lower costs than existing ones which is going to destroy any profits above cost of capital. The price argument isn't true -- IBM isn't charging a premium and their reputation isn't exactly the best. It's also not strictly a commodity product. IBM took CIA to court (and lost) over a cloud computing contract awarded to Amazon; IBM was the lower bidder but Amazon offered a technically superior product. Its also hard to say that this is a commodity product when server farms are undergoing a period of rapid technological development, where custom software and proprietary hardware (though, see Facebook's open hardware initiative) make a large difference in the cost of operating the server farm. To be clear, IBM doesn't have any advantages in the cloud other than their ongoing relationship with business and the other services they provide. Their services are "sticky" in the same way that any service business is sticky. Amazon is the clear leader, and Google and Facebook have far more expertise. (I am not super interested in any of these stocks, btw). Also, I think the airline analogy misses the duration of the debt required to buy an airplane. Airplanes are vastly more expensive than that can be expected to be earned over a few years. Airlines don't have the equity capital to purchase airplanes and have to finance the purchases with debt. They go bankrupt because they buy lots of planes after a boom and then subsequently fill the seats during any downturn in the market, and are unable to service the debt. Servers don't really have the same problem -- I believe the duration of AMZN's capital lease for server farms is 3 years, it can roll off any debt tied to cap-ex much more quickly. last thing, I'm not sure IT revenue will go down. I think it will go up, but I don't know. It depends on the price elasticity of demand. The cloud, along with other advances, generally makes data analytics cheaper and easier -- so you should see more, not less demand. Link to comment Share on other sites More sharing options...
TheAiGuy Posted July 10, 2015 Share Posted July 10, 2015 I don't know that that is true -- that a shift to the cloud make IT a utility. A shift to the cloud obviates the needs to maintain and update your own servers, which is cap-ex intensive and difficult in its own right. But servers aren't the same as IT, you still need software (probably customized to your business) interaction with machines all over your business network. Maintaining servers is just one part of the value chain. Please help me to understand what cloud services IBM's trying to sell primarily. I thought IBM's (and other IaaP providers') message is: "move your system onto our cloud to lower your infrastructure/pumping capex." So, I'd imagine the custom app/software stack already exists. The capex to maintain this custom portion of the stack won't be different regardless it's running on a private server or on IBM's cloud. It's the capex to maintain the low-level infrastructure that IBM tells their customers they can save. Am I right? If so, isn't "maintaining servers" the business IBM is trying to get into? Isn't this the worst part of the value chain? The value proposition isn't the hardware, it's the expertise. These technologies are difficult to manage, expensive and rapidly changing. Its beneficially to have someone else do it for you if its not a core competency and you aren't huge. For example, a regional retailer could benefit from analytics but won't have the scale for it to make sense to build a server farm in Iceland, where electricity is cheep. The cap-ex outlay is part of the story, and there are certainly efficiencies to be gained with one company managing a fungible resource, but it's not the whole story. In addition, there is often customization needed in terms of hardware and software that make it impractical to change. Google and amazon have their own propriety software that's tied to their hardware, and overtime that is a potential source of lock in. It'll have to play out, though. I should also note that I'm not saying anything about IBM specifically. I'm more speaking about my own experience with the cloud professionally, which has largely been through Amazon and a computing cluster run by a university. OK, if it's really sticky, that means "cloud will reduce the TCO" is an illusion to the customers. Being sticky means over time the vendors can raise prices. That means the low costs today to customers are only baits. Is that your view? My view is that the cloud will make things cheaper for the customers, so they will buy more of it. I don't know if they'll buy it from IBM. Link to comment Share on other sites More sharing options...
Jurgis Posted July 10, 2015 Share Posted July 10, 2015 The last quote in TheAiGuy's post is misattributed to me. portfolio14 said this, not me. 8) Link to comment Share on other sites More sharing options...
TheAiGuy Posted July 10, 2015 Share Posted July 10, 2015 The last quote in TheAiGuy's post is misattributed to me. portfolio14 said this, not me. 8) ha. sorry Link to comment Share on other sites More sharing options...
Guest Schwab711 Posted July 10, 2015 Share Posted July 10, 2015 Do you expect higher margins for IT servicers in the future? I thought the point of cloud services (from the customer perspective) is that less consulting expertise is needed relative to their current network setups because the cloud services are standardized? I thought AMZN/MSFT/GOOG is stealing business from current users (presumably IBM customers) more than they are enticing first-time IT customers. Aren't the big 3 just moving companies with private networks onto their cloud services to lower their overall costs and increase downtime (in exchange for outsourcing IT jobs to the big companies or consults because it is such new technology)? Am I in the right ballpark for understanding the industry changes? If so, wouldn't this point to lower overall revenues? Since it's roughly the same services being provided for lower costs, what incentives do customers have to increase total revenue/total IT services? Where is the increase in demand coming from to [more than] offset lower revenues? Also, do you believe there is or will be some additional value in having a large market share in server farms above and beyond the profits earned (similar to speculations about social media data)? That's the only reason I could see someone being excited about the future of AWS or similar cloud services. I personally see server farms as having potential new liabilities down the road due to their power consumption, cooling needs, and the potential for shared liability for data security. Maybe that's way too much predicting :) Link to comment Share on other sites More sharing options...
TheAiGuy Posted July 10, 2015 Share Posted July 10, 2015 I don't know what will happen to margins, honestly. Margins are pretty high for IT in general. I do think the cloud is a much bigger deal than just replacing current network setups. A big part of the cloud is expanding the size and scope of internet businesses, which is growing rapidly in size. The conical example of this trend is Netflix, which is hosted on Amazon Web Services, even though Amazon is a direct competitor. Server efficiency isn't a vector that makes sense for netflix to compete on. A lot of business are going to need major web presence if their going to survive (particularly in retail) and they're unlikely to run their own servers. I don't know about IBM and where there customers are coming from but Azure and AWS are growing rapidly. Microsoft claims that a lot of the Azure clients were strictly customers that used Office/Exchange, so that would be an increase in revenue/client b/c the client is willing to buy more because the service is cheaper. My guess is that the decrease in current IT costs with the cloud is a foot in the door. Everyone's technology expenditures are going to go up, a lot, overtime but (because) the unit cost will be lower. Microsoft wants to sell Azure along with a host of productivity software, my understanding is that Google and Amazon are largely focused on the internet and who the hell knows what IBM is selling. It will probably work out for all of them. No, I don't think market share matters. Scale matters, in that it will have a lot to do with the cost of maintaining server farms. Link to comment Share on other sites More sharing options...
ourkid8 Posted August 6, 2015 Share Posted August 6, 2015 Anyone adding at these prices besides Buffett? :) Link to comment Share on other sites More sharing options...
valueyoda Posted August 6, 2015 Share Posted August 6, 2015 Still short. I would actually buy a position below $135, as I think that non-gaap EPS will drift to the $10-$12 range before the transformation is complete. There are still way too many bulls that want to catch the bottom, while a meaningful turnaround is still quarters away at least. Link to comment Share on other sites More sharing options...
100 Shares Posted August 7, 2015 Share Posted August 7, 2015 At what price did you initiate your short? Also curious at the time, what was your thinking? What's your thinking now holding onto this as short when you are willing to switch to long after only a further 15% price decline? Link to comment Share on other sites More sharing options...
valueyoda Posted August 7, 2015 Share Posted August 7, 2015 I started my short position in the middle of 2014 around $180. The thesis is simply that IBM will face significant competition on its traditional services and will face a shrinking revenue base and declining operating margins. IBM will try to grow through cloud computing, but this is still too small and has more incumbent competitors. In addition, IBM will no longer be able to prop up non-gaap earnings per share by repurchasing shares as aggressively as it did in the last 6 years and has less financial flexibility to pull off large takeover candidates in addition to small buybacks and its regular dividend. The price so far has only stayed up because Berkshire has been buying its stake in addition to IBM repurchasing its own shares, along with all the Buffett followers that have bought a stake in IBM as well. It so reminds me of HPQ in 2011 when the stock was down quite a bit and was screening attractively, only to get much worse as financial engineering was unable to overcome signficant business headwinds. Is it my most favorite short? No, but it is still a decent one because I think that the turnaround is still further away than the consensus thinks. So far, they have given IBM the benefit of the doubt. Imagine how many will sell if it doesn't manifest itself soon. IBM will stay be relevant, once the turnaround is complete, but similar to HPQ its moat has shrunk considerably from a decade ago. I don't know if I would buy a stake at $135. Depends on the likelihood of the eventual recovery. Perhaps I would. I don't think it is the turnaround that we saw at IBM in 1993. Link to comment Share on other sites More sharing options...
KCLarkin Posted August 7, 2015 Share Posted August 7, 2015 What is your return from shorting a stock from $180 to $156, after borrow and dividends? Just wondering because druck said it was a high probability short, but it doesn't seem too lucrative. Link to comment Share on other sites More sharing options...
benchmark Posted August 7, 2015 Share Posted August 7, 2015 I started my short position in the middle of 2014 around $180. The thesis is simply that IBM will face significant competition on its traditional services and will face a shrinking revenue base and declining operating margins. IBM will try to grow through cloud computing, but this is still too small and has more incumbent competitors. In addition, IBM will no longer be able to prop up non-gaap earnings per share by repurchasing shares as aggressively as it did in the last 6 years and has less financial flexibility to pull off large takeover candidates in addition to small buybacks and its regular dividend. The price so far has only stayed up because Berkshire has been buying its stake in addition to IBM repurchasing its own shares, along with all the Buffett followers that have bought a stake in IBM as well. It so reminds me of HPQ in 2011 when the stock was down quite a bit and was screening attractively, only to get much worse as financial engineering was unable to overcome signficant business headwinds. Is it my most favorite short? No, but it is still a decent one because I think that the turnaround is still further away than the consensus thinks. So far, they have given IBM the benefit of the doubt. Imagine how many will sell if it doesn't manifest itself soon. IBM will stay be relevant, once the turnaround is complete, but similar to HPQ its moat has shrunk considerably from a decade ago. I don't know if I would buy a stake at $135. Depends on the likelihood of the eventual recovery. Perhaps I would. I don't think it is the turnaround that we saw at IBM in 1993. I would not short IBM, but I would certainly not invest in it, having worked for the big blue. I agree with you that their financial engineering isn't going to sustain. Link to comment Share on other sites More sharing options...
Palantir Posted August 7, 2015 Share Posted August 7, 2015 I started my short position in the middle of 2014 around $180. The thesis is simply that IBM will face significant competition on its traditional services and will face a shrinking revenue base and declining operating margins. IBM will try to grow through cloud computing, but this is still too small and has more incumbent competitors. In addition, IBM will no longer be able to prop up non-gaap earnings per share by repurchasing shares as aggressively as it did in the last 6 years and has less financial flexibility to pull off large takeover candidates in addition to small buybacks and its regular dividend. The price so far has only stayed up because Berkshire has been buying its stake in addition to IBM repurchasing its own shares, along with all the Buffett followers that have bought a stake in IBM as well. It so reminds me of HPQ in 2011 when the stock was down quite a bit and was screening attractively, only to get much worse as financial engineering was unable to overcome signficant business headwinds. Is it my most favorite short? No, but it is still a decent one because I think that the turnaround is still further away than the consensus thinks. So far, they have given IBM the benefit of the doubt. Imagine how many will sell if it doesn't manifest itself soon. IBM will stay be relevant, once the turnaround is complete, but similar to HPQ its moat has shrunk considerably from a decade ago. I don't know if I would buy a stake at $135. Depends on the likelihood of the eventual recovery. Perhaps I would. I don't think it is the turnaround that we saw at IBM in 1993. Well played, I never had the cojones to short this despite wanting to when it was at 200. Link to comment Share on other sites More sharing options...
stahleyp Posted August 7, 2015 Share Posted August 7, 2015 I started my short position in the middle of 2014 around $180. The thesis is simply that IBM will face significant competition on its traditional services and will face a shrinking revenue base and declining operating margins. IBM will try to grow through cloud computing, but this is still too small and has more incumbent competitors. In addition, IBM will no longer be able to prop up non-gaap earnings per share by repurchasing shares as aggressively as it did in the last 6 years and has less financial flexibility to pull off large takeover candidates in addition to small buybacks and its regular dividend. The price so far has only stayed up because Berkshire has been buying its stake in addition to IBM repurchasing its own shares, along with all the Buffett followers that have bought a stake in IBM as well. It so reminds me of HPQ in 2011 when the stock was down quite a bit and was screening attractively, only to get much worse as financial engineering was unable to overcome signficant business headwinds. Is it my most favorite short? No, but it is still a decent one because I think that the turnaround is still further away than the consensus thinks. So far, they have given IBM the benefit of the doubt. Imagine how many will sell if it doesn't manifest itself soon. IBM will stay be relevant, once the turnaround is complete, but similar to HPQ its moat has shrunk considerably from a decade ago. I don't know if I would buy a stake at $135. Depends on the likelihood of the eventual recovery. Perhaps I would. I don't think it is the turnaround that we saw at IBM in 1993. Well played, I never had the cojones to short this despite wanting to when it was at 200. haha I agree. Feeling that one knows a company better than Buffett is ballsy. Link to comment Share on other sites More sharing options...
bargainman Posted August 8, 2015 Share Posted August 8, 2015 honestly Buffett doesn't know tech that well, and ibm is still tech to a large degree. Plus this is an inflection point in many ways which makes things even harder on incumbents. To me the big problem is that no really good brilliant tech person wants to work at ibm. They are squeezing their employees and that's going to kill them. Plus they are keeping talent away. They can't hire the best talent, and for a tech company that's the kiss of death or mediocrity, buybacks & financial engineering or not.... Link to comment Share on other sites More sharing options...
KCLarkin Posted August 27, 2015 Share Posted August 27, 2015 Sequoia has a good summary of IBMs recent challenges. Most pundits dont't discuss the real issues. Page 17: http://www.sequoiafund.com/Reports/Transcript15.pdf Link to comment Share on other sites More sharing options...
rb Posted August 27, 2015 Share Posted August 27, 2015 Sequoia has a good summary of IBMs recent challenges. Most pundits dont't discuss the real issues. Page 17: http://www.sequoiafund.com/Reports/Transcript15.pdf I just finished reading the transcript. I am always impressed by the ability of the people at sequoia to distill issues. Especially in the case of IBM which has so many moving parts and it's really hard to analyze. That being said I am getting more and more positive on IBM. A lot has to do with valuation of course. But in the current era of high flying tech startups IBM still has very valuable and resilient franchises. It has new stuff going on that if they work out they're going to propel the stock quite a bit given current valuations. It's not looking too bad these prices. Btw, regarding Sequoia's statements about porting apps. When I was at RBC the core app was on IBM mainframe and was by far the best running app in the company. They've tried new apps (not the core ones) on different platforms and they all turned out very expensive and ran like crap. Just a bit of anecdotal stuff. Link to comment Share on other sites More sharing options...
tombgrt Posted September 1, 2015 Share Posted September 1, 2015 Thanks for the Sequoia transcript KCLarkin! Anyone else getting very interested here? Another big fear day or two and I might pull the trigger with jan 2017 calls. The 2018 leaps are only coming out in October right? Link to comment Share on other sites More sharing options...
supertutti Posted September 1, 2015 Share Posted September 1, 2015 Starting to get interested as well. Any idea how much of their business is reliant on international purchasing? China, India etc? Also, what strike price are you considering? Link to comment Share on other sites More sharing options...
vinod1 Posted September 1, 2015 Share Posted September 1, 2015 Thanks for the Sequoia transcript KCLarkin! Anyone else getting very interested here? Another big fear day or two and I might pull the trigger with jan 2017 calls. The 2018 leaps are only coming out in October right? Yes. Added to the position today. An above average business selling at below average prices. Vinod Link to comment Share on other sites More sharing options...
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