$IBM – difficult to see a franchise

Ah, the American markets are so much more fun than the UK.

The big news about $IBM is, of course: “Forbes reports that IBM will be laying off 26% of its employees next week”.

I’m not sure how anyone can know that, but it doesn’t bode well, if true. Premarkets are up 0.89%, but I’m not sure why it’s viewed as a positive. Don’t they need those employees to generate revenue? I suspect that management is cutting into the vital body tissue in order to make up its financial targets.

IBM is on a PE of 9.9, with a market cap of $154.5b, according to Google. It’s got current assets of $49.4b, and total liabilities of $105.7b. So it’s not attractive to me as a deep value play.

If Buffett thought IBM had some kind of franchise, then I’d say there was a fair bit of evidence to suggest that he was wrong.

IBM is to make a big bet on “the cloud” – which is an extraordinarily vague statement. IBM is up against a lot of competitiors, and isn’t even number 1 in the field. “The Cloud” is something that anyone can try their hand at.

I see no “franchise” by IBM in either consultancy or “clouds” (which is surely another name for Web 3.0). IBM is making a big bet, and we have no idea if it will pay off.

Forget platforms. Vendors think they can get lock-in on their platforms, but it often proves very difficult. Look at Java, for example. It’s a “success” of sorts, but they have to make a lot of it freely available to attract developer attention. It’s the same deal with Microsoft’s dotNet. No matter how much Microsoft wanted to lock people into it, but recently they announced: “Microsoft is providing the full .NET server stack in open source, including ASP.NET, the .NET compiler, the .NET Core Runtime, Framework and Libraries, enabling developers to build with .NET across Windows, Mac or Linux.”

That Microsoft is acknowledging Linux raised a few eyebrows. I doubt that Linux developers will be interested in .Net – they’re very aware of the issues of vendor lock-in, and are unlikely to bite into anything that they consider bait.

Developers have a wealth of free software and frameworks these days. It’s difficult to believe that IBM can provide anything special.

Then there’s the news of IBM’s new-fangled z13 mainframe. From toptechnews (http://is.gd/LSsDyB): “Big Blue just launched what it’s calling one of the most sophisticated computer systems ever built. IBM’s new z13 mainframe caps a $1 billion investment and five years of development — and taps into over 500 new patents in collaboration with more than 60 clients.”

That seems like another risky strategy to me. Companies like Google and Yahoo use bog-standard machines, and there’s even talk about using cheap ARM processors as servers. No-one has come up with a proper product yet, but it’s an interesting idea. IBM may have a niche in the mainframe market, but if that market is contracting, it’s a dangerous market to be in.

IBM seems to want to link the z13 in with smartphones, but I think they’re just trying to get the buzzwords in. Look at Google’s Android, for example. It has it’s own SDK (Software Developer Kit). I also reckon that Google is “quite good” when it comes to their server infrastructure. The same goes for Amazon AWS. Who is going to care, in the slightest, what IBM has to offer?

Buffett’s initial purchase is looking decidely iffy. Maybe it’ll work as a value play, I dunno, but they can be difficult to call. It looks like IBM are making a whole bunch of strategic mistakes. What will be interesting to see is, IF cuts are announced, how Buffett will react
* if he buys more, then I see him potentially walking into a trap. I doubt that Buffett will buy, though, as IBM has changed a lot
* if he does nothing, then I would probably see that as a sign that he has cold feet
* if he bails, then maybe expect another repeat of Tesco, with the share price crashing, and providing an opportunity for traders or medium-term investors to take a long position.

May you live in interesting times.


About mcturra2000

Computer programmer living in Scotland.
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