IBM - International Business Machines

[Eye4Valu]

It seems to me that IBM has withstood technological change for quite some time. How long has IBM been around? Obviously technology has drastically changed throughout that whole time period. Somehow they keep themselves relevant.

[sleepydragon]

It seems to me that IBM has withstood technological change for quite some time. How long has IBM been around? Obviously technology has drastically changed throughout that whole time period. Somehow they keep themselves relevant.

 

yeah. People think IBM is a technology company. that's wrong. they have a very strong sales organization, they are very sales-oriented, their "products" are clients-driven. They are more like an integrator of various technology products, so they do not depend on any technology. The IT products are getting increasingly sophisticated: storage systems, 24x7 of reliability, duplication and backups etc.., security systems, networks. It takes huge resources to make all these work together, otherwise the business can't run in today's world where a lot of data processing are driving the business.

 

Among large system integrator (IBM, HP, DELL and EMC), IBM has the reputation of most reliable, solid products. It takes the longest time for an IT supplier to get qualified by IBM, but IBM is the golden door for the suppliers.

 

if DELL can pay that much for EMC, IBM is severely undervalued. EMC and IBM are in very similar businesses- at least in the area of storage systems.

[scorpioncapital]

From the CEO's speech yesterday I almost got the impression IBM is like the technology brother of Goldman Sachs for world governments - helping them modernize, setup systems, make decisions. An investment in the growth of government?

 

 

 

 

[vinod1]

They bought Weather company, cause weather impacts like everything.  :o And somehow Weather company is a platform for Internet of things. 

 

Perhaps someone in IBM's acquisitions team thought that buying the Weather company meant they are actually buying the "cloud".  :)

 

Vinod

[yitech]

They bought Weather company, cause weather impacts like everything.  :o And somehow Weather company is a platform for Internet of things. 

 

Perhaps someone in IBM's acquisitions team thought that buying the Weather company meant they are actually buying the "cloud".  :)

 

Vinod

 

LOL! That shows IBM is taking the whole cloud-on-cloud thing very seriously!

[portfolio14]

They are more like an integrator of various technology products, so they do not depend on any technology. The IT products are getting increasingly sophisticated: storage systems, 24x7 of reliability, duplication and backups etc.., security systems, networks. It takes huge resources to make all these work together, otherwise the business can't run in today's world where a lot of data processing are driving the business.

 

Granted that Fortune 1000 have nowhere to go but will stay with IBM. But today's startups will be tomorrow's Fortune 1000. If nowadays these startups all deploy their systems on AWS with the complexity (storage systems, 24x7 of reliability, duplication and backups etc.., security systems, networks) hidden inside AWS, where is the need for IBM's integration services?

[LowIQinvestor]

If you covered up the name IBM, and spun off their "cloud" business---maybe slap a cool name on it ---Cloudly?; it could be worth somewhere between $40- $70B ;D

 

Total cloud revenues (public, private and hybrid) increased more than 45 percent

(more than 65 percent adjusting for currency and the divested System x business)

year-to-date, and is $9.4 billion over trailing 12 months.

 

I'm still a buyer- happy to collect the 3.7% yield in the meantime.

[vinod1]

They are more like an integrator of various technology products, so they do not depend on any technology. The IT products are getting increasingly sophisticated: storage systems, 24x7 of reliability, duplication and backups etc.., security systems, networks. It takes huge resources to make all these work together, otherwise the business can't run in today's world where a lot of data processing are driving the business.

 

Granted that Fortune 1000 have nowhere to go but will stay with IBM. But today's startups will be tomorrow's Fortune 1000. If nowadays these startups all deploy their systems on AWS with the complexity (storage systems, 24x7 of reliability, duplication and backups etc.., security systems, networks) hidden inside AWS, where is the need for IBM's integration services?

 

In a world where today's startups are in Fortune 1000, presumably technology would have progressed enough and there would have been newer competitors to Amazon with better storage systems, 24x7 of reliability, duplication, yada yada...

 

IBM would hopefully be helping these new Fortune 1000's to move from AWS to these newer platforms.

 

Vinod

[dutchman]

Has buffett ever been wrong on a position this size?

I know tesco, posco etc. were mistakes, but they were relatively small.

[KCLarkin]

Granted that Fortune 1000 have nowhere to go but will stay with IBM. But today's startups will be tomorrow's Fortune 1000. If nowadays these startups all deploy their systems on AWS with the complexity (storage systems, 24x7 of reliability, duplication and backups etc.., security systems, networks) hidden inside AWS, where is the need for IBM's integration services?

 

I'm skeptical that there are many "yesterday startups" that are major customers of IBM. Losing today's startups doesn't seem a killer blow. It's mostly banks, insurers, airlines...

 

Also, for the most part, AWS doesn't hide the real complexity. It just automates the low-level drudgery. The real complexity is integrating legacy systems with mobile, analytics, etc. You are a bank that runs your systems of record on an IBM mainframe. Some of the code was developed in the 1970s. Now you want to integrate mobile banking with cheque image deposits into your existing system. Now THAT is complex.

 

IBM does a lot of lower value IT services that will be cannibalized by AWS. But they would probably lose this business to the Indian IT shops anyway.

[scorpioncapital]

I hope this thread does not approach the 400+ pages of the Valeant page with a blowup on the last few pages :P (sorry for this contribution, I am long IBM)

 

 

[sleepydragon]

They are more like an integrator of various technology products, so they do not depend on any technology. The IT products are getting increasingly sophisticated: storage systems, 24x7 of reliability, duplication and backups etc.., security systems, networks. It takes huge resources to make all these work together, otherwise the business can't run in today's world where a lot of data processing are driving the business.

 

Granted that Fortune 1000 have nowhere to go but will stay with IBM. But today's startups will be tomorrow's Fortune 1000. If nowadays these startups all deploy their systems on AWS with the complexity (storage systems, 24x7 of reliability, duplication and backups etc.., security systems, networks) hidden inside AWS, where is the need for IBM's integration services?

 

A lot of tech startup want to work with IBM. If their products get qualified by ibm, they immediately got the scale. Their products will be available to all IBM's clients. It's basically the ticket to IPO. Ibm knows that, so they also use this leverage to make startups make products that will add value to ibm's offerings.

[Jurgis]

I think that what Buffett admires about the company is that it does not seek growth at all costs.

 

I think it's a fallacy that every time someone talks about declining revenues at IBM, IBM bulls respond with the strawman argument that IBM does not seek growth at all costs. And they are somehow very self satisfied with this argument as if it explains how successful shareholder friendly companies operate.

 

Nobody asks IBM to seek growth at all costs. However, apart from cigar butt stocks, every single company that has been successful long term has done so by growing revenues and profits. To argue against revenue growth is to argue for a subpar returns at best if we take long term view.

 

Please show me a single company that has been successful long term (not for couple of years) by not growing revenues.

[Txvestor]

The bottom line question when thinking about IBM today is do you beleive there is a base of revenue within that shrinking revenue numbers that is immovable and mission critical to its customers.

I beleive there is, and it is a very lucrative and defensible moat protected base which can't be replicated. On that IBM will generate a very nice inflation protected return and live long into the future. The more share buybacks they do in the interim at low valuations, the more concentrated the ownership in this indispensable piece of the global economic machine becomes.

The revenue growth investments are relatively small and if they serve as business bolt ons to widen and deepen this moat, then thats great. I see their cloud offerings, watson, enterprise security etc. as such efforts.

Where will revenues stabilize, thats an important question, and I think we are likely not more than a year or two away and perhaps no more than 10-20% away, and that is perfectly fine. Their revenue base and manpower is so huge that they can rightsize the ship to suit. An IBM investment at these levels is very likely to produce a quite satisfactory result over a 10yr time span in my view.

[sleepydragon]

i think if it's not because of snowden and strong USD, ibm would have some revenue growth.

[scorpioncapital]

If a company makes $100 billion revenue and 20% net, in 5 years, investor gets back all their money. If then revenues drop 50% or even 80%, it's all free money thereafter. In this sense, it may be a cigar butt but it's one hell of a cigar butt that has such high margins. Usually cigar butts have eroding margins together with eroding sales. This suggests that under the surface there are changes going on to the business mix and as the CEO says, moving to higher value. Gilead Sciences has 30 billion in revenue and has an 80% margin. Imagine if IBM can sustain the margin or even increase it, then it matters not at all - to me anyway, whether revenues dip some % slowly over time because the lower revenue stream is coming from a new source - a high margin business. In essence, IBM is eating itself up from the inside and keeping only it's name - IBM.

 

 

[ZenaidaMacroura]

I think that what Buffett admires about the company is that it does not seek growth at all costs.

 

I think it's a fallacy that every time someone talks about declining revenues at IBM, IBM bulls respond with the strawman argument that IBM does not seek growth at all costs. And they are somehow very self satisfied with this argument as if it explains how successful shareholder friendly companies operate.

 

Nobody asks IBM to seek growth at all costs. However, apart from cigar butt stocks, every single company that has been successful long term has done so by growing revenues and profits. To argue against revenue growth is to argue for a subpar returns at best if we take long term view.

 

Please show me a single company that has been successful long term (not for couple of years) by not growing revenues.

There are a few, but off the top of my head O'Reilly (ORLY).

[merkhet]

IIRC, Texas Instruments had 0% revenue growth for a decade but 13% FCF per share growth because of margin growth and share buybacks.

[Dalal.Holdings]

Nobody asks IBM to seek growth at all costs. However, apart from cigar butt stocks, every single company that has been successful long term has done so by growing revenues and profits. To argue against revenue growth is to argue for a subpar returns at best if we take long term view.

 

Imagine a company earning high returns on capital. Imagine that instead of spending those returns on an expensive acquisition, they are returned to you, the owner (buybacks/divi). Imagine this company has a P/E of 10 (earnings yield of 10%). Every year, you reinvest your dividends and your stake of the business grows 11% per year. The revenues don't grow and the earnings don't grow. Now model something growing at 11% per year over 10 years and you'll see the power of compounding.

 

Now IBM has grown profits without growing revenue. They've grown margins. Revenues have been stable after divestitures/currency. They may or may not grow. But they've been flat for a few years. Go look at the revenue of See's Candies at Berkshire's reports. Many multi-year stretches of flat/declining revenue. Still a small player in the candy world, yet has returned enormous amounts to its owner.

 

It's much easier for a business of small size to grow revenues right. It's MUCH harder for a business of IBM's size (revs $80-100B) to grow revenues while maintaining adequate returns. It's the law of diminishing returns.

[vinod1]

I think that what Buffett admires about the company is that it does not seek growth at all costs.

 

I think it's a fallacy that every time someone talks about declining revenues at IBM, IBM bulls respond with the strawman argument that IBM does not seek growth at all costs. And they are somehow very self satisfied with this argument as if it explains how successful shareholder friendly companies operate.

 

Nobody asks IBM to seek growth at all costs. However, apart from cigar butt stocks, every single company that has been successful long term has done so by growing revenues and profits. To argue against revenue growth is to argue for a subpar returns at best if we take long term view.

 

Please show me a single company that has been successful long term (not for couple of years) by not growing revenues.

 

If you want growth you should buy Valeant :) Sorry, cannot help myself.

 

As others have pointed out, do you really need growth to get decent returns at the current price? Even if revenues decline modestly for a few years but margins are more or less maintained, you would still end up with not too bad a result.

 

IBM has been hindered by their previous roadmap. They tried a few tricks (taxes, buybacks) trying to meet the numbers and it is possible they are did not move as aggressively as they should have in making necessary changes (restructuring, investments, etc). Thankfully they have abandoned the roadmap and are now moving in the right direction. It is going to take some time and revenue growth would follow.

 

Vinod

[RadMan24]

I think that what Buffett admires about the company is that it does not seek growth at all costs.

 

I think it's a fallacy that every time someone talks about declining revenues at IBM, IBM bulls respond with the strawman argument that IBM does not seek growth at all costs. And they are somehow very self satisfied with this argument as if it explains how successful shareholder friendly companies operate.

 

Nobody asks IBM to seek growth at all costs. However, apart from cigar butt stocks, every single company that has been successful long term has done so by growing revenues and profits. To argue against revenue growth is to argue for a subpar returns at best if we take long term view.

 

Please show me a single company that has been successful long term (not for couple of years) by not growing revenues.

 

What he meant was simple, smart capital allocation.

[Jurgis]

IBM is not See's candies. It's not even a cableco like utility. If it doesn't grow, it will not stay flat, it will shrink and it will start losing money at some point.

 

Ginny Rometty realizes this more than the people on this thread. That's why she's trying to grow analytics and security and some other buzzwords. Whether she's gonna be successful is another question.

 

It's a business where you have to innovate to stay in place and you have to innovate squared to get ahead. She wasn't joking when she said that every company is a competitor of IBM.

 

Sure, IBM has some very strong assets and some moats, so it can compete in some areas from a position of strength. But it's not gonna be a walk in the park. And it's not gonna be See's candies.

 

(BTW, the stock is somewhat cheap, so it might work out OK. But if it does, the reason is unlikely to be no-growth-and-share-buybacks).

[scorpioncapital]

I am reading the BEST investment/business/economics book I have ever read in my life - Zero to One by Peter Thiel (founder of Paypal). This book has changed my investment style and is an eye opener. I can't recommend it highly enough. Reading it will accelerate your investment and business skill 1000%.

I came across Palantir in it -

 

'Ten years ago, we set out to create products that would transform the way organizations use their data. Today, our products are deployed at the most critical government, commercial, and non-profit institutions in the world to solve problems we hadn’t even dreamed of back then.'

 

https://www.palantir.com/about/

http://www.cnbc.com/2014/06/17/disruptors-in-2014-palantir.html

http://www.slideshare.net/TheodoreHeiser/palantir-company-presentation

 

This sort of reminds me of what IBM & Watson are trying to do with Analytics. In fact, it almost looks like a clone of Watson.

 

Palantir was mentioned in the book as the 2nd most valuable investment from the 2005 Founder's Fund that funded Facebook.

 

If this is the case, either IBM has a very bright future ahead in this field or it may be eaten for lunch by this start-up. Either is possible But it does suggest to me that IBM is fishing in the right pond.

 

[Palantir]

So outperformance for a two year period back in 1993...

[Jurgis]

So outperformance for a two year period back in 1993...

 

Bill Anders (General Dynamics) +23.3%/year over 17 years versus +8.9%/year for the S&P 500 index, see "The Outsiders" chapter 3 for more info.

 

Right, but revenues did not decline for 17 years.

 

Edit: BTW, yes, Ginny Rometty may be Outsider in progress. It also may be a slow mo crash in progress. Pick your choice.