Thread regarding IBM layoffs

Lack of vision goes back to Palmisano
Computing clouds are very relevant, but "they have a place and an appropriate use. It's not all of the environment."

https://www.zdnet.com/article/palmisano-outlines-ibms-2015-roadmap-earnings-to-double-consumerization-mocked/

Let’s not forget the board of directors during Palmisanos and Ginni’s tenure. They were just as much to blame for IBMs current cloud dilemma and lack of investment in the Cloud

@2auu+1sRpcp63

Sounds like Financial Engineering.

Isn't this a violation the IBM Business Control Guidelines ?

Yeh that was Palmisanos and Gianni’s big blunder - focusing on earnings per share rather than investing in the Cloud.

When cloud was first taking off there were a couple of analysts who looked at Capex spend. Amazon and Microsoft were spending massive amounts of CapEx, Google a little less, Oracle a lot less, and IBM hardly any. Turned out it was a good metric, highly predictive of success. AI success will require equal or greater CapEx spend as cloud. Rinse and repeat.

IBM is forecast to produce $12 billion in free cash flow this year, partly due to the lack of new investment

Let me guess: the exec bonuses are based on increasing cash flow, so by pulling (or not pulling) whatever levers are needed to achieve that .. big bonus!! (cynically basing this theory on our previous CEO's behavior - her goal was increasing earnings per share even while it destroyed the company)

With the massive AI opportunity, IBM should be investing aggressively ... instead the company is cutting back on capex.

Gotta meet those free cash flow incentives.

If the incentives were pure stock options (at today's strike price) with vesting cliffs at today + 4 years then we'd get better long-term thinking to increase long term share price.

Criminals.

The issue is 85-90% of the opportunities are in the low end where IBM doesn’t even play anymore (remember Ginni’s exit out of Intel). The enterprise customers can eat AI BUT choose to put the majority of the opportunities on Intel as the commodity HW/SW justifies itself vs using “Enterprise” HW and SW. IBM is a “niche” player, and will only get profitable opportunities in the Enterprise space. Everything else goes to the commodity and thought leadership players (Google/microsoft/amazon) That’s the reason you see IBM pursuing partnerships. They have to have a commodity offering when the enterprise customers request it. NET NET IBM has a cloud, BUT it’s focused is on Enterprise, and that’s not where the bulk of the opportunities are located. Look for IBM to continue to shrink as they sharpen their “niche” focus, and withdrawal from the commodity marketplace.

[Complete article referenced by OP quoted below].

By: Stone Fox Capital
May 29, 2024 5:01 PM ET

Summary

IBM's AI-related revenues are not generating significant sales despite numerous partnership and collaboration announcements.
The company's GenAI business remains relatively small, and the backlog is not large enough to make a significant impact.
IBM's lack of investment in AI and cutting back on capex raises concerns about its ability to capitalize on the AI opportunity.
The stock is already fully priced at 16x '25 EPS targets, with forecasts for limited growth.

After the prior quarter, we warned investors not to buy into the AI hype at International Business Machines Corporation (NYSE:IBM). The tech giant has long had a leading artificial intelligence, or AI, product in Watson without producing any meaningful revenue. My investment thesis remains Neutral on the stock following another weak quarter and all signs the company isn't really investing into the AI opportunity.

https://static.seekingalpha.com/uploads/2024/5/28/saupload_IBMd161841566i.png

Ally Hype

IBM does a lot of headline grabbing announcements regarding AI, but the tech giant doesn't actually do much to generate sales. Just since the start of May, IBM has these following deal announcements:

May 21 - IBM expands watsonx portfolio to scale AI on Amazon Web Services.
May 15 - Palo Alto Networks and IBM announces partnership to deliver AI-powered security offerings for customers
May 9 - IBM launches new Microsoft copilot capabilities amid AI push
May 8 - ServiceNow collabs with IBM, Microsoft to combine GenAI capabilities
May 8 - IBM and SAP to expand collaboration to build new gen AI capabilities

Every week, IBM has some partnership or collaboration with a major tech company to advance AI produces. The problem is that the company announced similarly deals in Q1, and AI related revenues aren't moving the needle.

In late April, IBM reported these numbers for Q1 '24:

Q1 Non-GAAP EPS of $1.68 beats by $0.09.
Revenue of $14.5 billion (+1.5% YoY) misses by $80 million.

The company only guided to mid-single digit revenue growth for the year. IBM revenues are running at a $60+ billion rate, but the AI related software category is only a small fraction of the business.

The Red Hat cloud business is a prime example of the struggles at the tech company. Cloud services are booming, with Microsoft (MSFT) and Google (GOOG) reporting 20% to 30% growth rates, yet the much smaller Red Hat business only grew 9%.

The GenAI business remains relatively small with backlog only in the $1 billion range per CEO Arvind Krishna on the Q1 '24 earnings call:

Underneath that, our GenAI book of business, which is off to an extremely well start overall. Three quarters in since we announced our GenAI tech stack, watsonx last July. We have now eclipsed $1 billion book of business overall.

The company reported a GenAI backlog in the $500 million range following Q4. The backlog is growing rapidly, but the amounts are far too small to move the needle and very much tied to the consulting business with a book-to-bill growth rate of 1.15, but very little sales growth of 2% in the last quarter. In addition, IBM doesn't provide plenty of details on the timeline of this backlog, as an extended contract period could signal a much smaller annual revenue boost.

The key software sector reported 6% revenue growth, with ARR up to nearly $14 billion for 8% growth. IBM is still only 25% related to recurring revenues due to the combined Consulting and Infrastructure business at $8.3 billion in the last quarter, while quarterly ARR is only in the $3.5 billion quarterly range.

Priced For AI Bo-m

IBM only traded at $125 last year. The stock has fallen back to $170, but IBM hit a high of nearly $200 on the AI bo-m.

Consensus analyst EPS targets don't even forecast earnings growth hits 5% until 2025. Investors need to realize IBM missed revenue targets in the last quarter by $80 million, suggesting estimates are possibly too aggressive.

https://static.seekingalpha.com/uploads/2024/5/28/234751-17169292254987257.png

The stock still trades at 16x EPS targets for 2025, yet AI is forecast to generate limited additional growth. IBM actually trades at 3x the forecasted earnings growth rate, while 2x is considered expensive.

IBM is forecast to produce $12 billion in free cash flow this year, partly due to the lack of new investment. Net new capex during Q1 was only $0.4 billion, down $0.1 billion from last Q1.

With the massive AI opportunity, IBM should be investing aggressively in new watsonx AI products and data center functions for Red Hat, instead the company is cutting back on capex.

Over 10 years ago, IBM spent similar amounts on capex as Google and Microsoft, now the 2 tech giants spend 25x as much as IBM and the stocks are worth at least 15x. Both Google and Microsoft spent $10+ billion in quarterly capex last quarter, while IBM keeps cutting spending in the face of the massive opportunity.

https://static.seekingalpha.com/uploads/2024/5/28/saupload_be83e6a5693fb93c44331398629b2ea5.png

Under the best-case scenario where IBM accelerates growth, the stock is already priced for the AI bo-m. Under the likely scenario where IBM never generates 5% annual growth due in part to the lack of investment, the stock languishes and likely falls back to the prior $125 range.

Takeaway

The key investor takeaway is that IBM has no logical reason to rally from here. The stock has the potential to fall, suggesting the Neutral rating is likely too aggressive, even with the AI hype propping up plenty of stock valuations.

IBM has all the reason to aggressively invest in AI, yet the company is standing pat. On this alone, an investor should avoid IBM stock.

Look what IBM did to CentOS.

IBM had a PC business but dumped it .. to a company that is making $$$ from it.

IBM invented a lot of the concepts of cloud, but knew it was late to public commodity cloud, yet did not invest enough to catch up, and is completely out of the game now.

IBM had a chip business but somehow couldn't make it profitable .. sold for NEGATIVE $$$ to a company that is making tons of money with it.

IBM was early to interesting and possible useful AI but sc--wed up the direction and marketing so badly that the project was canceled and sold off in pieces and the key people are now at the competition. It remains to be seen whether or not this latest round of AI is pure hype, or if it will incrementally improve into something indispensable.

Blockchain was not something that was ever going to be practical and other companies mostly stayed away from it or offered token minimal support. Meanwhile IBM bet the farm on HypeLedger and wasted tons of time and money.

And so on.

For the past 12+ years, IBM is either late to technology, or gets impatient and abandons technologies - often just before they become important and profitable .. for other companies.

seekingalpha has spent two decades pump-and-dumping for Microsoft

Who stands to benefit from the "AI" hype?

Oh yes, Microsoft...

Microsoft has (thus far) only lost tens of billions of dollars on this hype.

Building and using LLMs is super-expensive. Almost nobody will pay to use them.

Microsoft sells a dud.

It's now deep in debt. 111+ billion dollars, worse than every company except Amazon.

I'd actually say we are doing better than expected in this field - probably not as cutting edge as some of the leaders but we have good competency and good research staff in this field. We'll see how things will pan out but I think we'll benefit.

Watch Apple as they are not doing anything right now and Microsoft is stumbling with 1000s of do-nothing copilots.

IBM will probably not profit from the AI trend, but not because of AI's inherent strengths or weaknesses. Rather, IBM will not profit from it because like everything else in the world, IBM shareholders and management have decided to sell out the company for cash.

Let's say for the sake of argument that there was an "insanely great" AI opportunity that was immediately available and staring everybody in the face. You'd jump on that opportunity, right? Google, Facebook, Apple, OpenAI, Microsoft...you know the names. They'd all attempt to monetize that opportunity and make products and services for it, getting lots of profit in the process.

You know what IBM would do? They'd hire people for 6 months and run a half-assed advertising campaign in places that old people view...Sunday golf shows on the 3 major broadcast networks, glossies in Fortune magazine, maybe a few WSJ ads. After a year, shareholders and management would start to question the value proposition of "that AI thing", and begin to wind down the entire operation.

A couple of years after that opportunity presented itself, the IBM AI thought leaders will have bolted the company for competitors. The rank-and-file "AI employees" would be on the RA chopping block. The entire AI thing would end up as a just a few numbers on an IBM annual report, listed as "write-down charges".

Oh, and remember Facebook, Apple, Google, Microsoft, OpenAI, etc.? They would be drinking champagne at company parties, driving fancy new cars with AI profits, starting up new families, and just enjoying life in general. That sort of thing happens when you take advantage of life's opportunities.

No surprise there… AI is just the latest hype… give it 2 years and IBM will no longer talk about AI. Kinda like Blockchain and other things.