IBM's Identity Crisis

Everybody knows IBM (IBM), but ask anybody what IBM does, and you're likely to get a blank stare, stammering, or the wrong answer...

Yes, it's a "tech company," but unlike Alphabet (GOOGL), Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META), and Apple (AAPL), IBM lacks an identity.

I suggested as much the other night when I was on CNBC's Last Call after the show's host, Brian Sullivan, said he wasn't really sure what IBM did. So he asked me, and this being live TV, I thought a second, then said something to the effect of... I have no idea. (You can see the clip here.)

Sure, it has software, consulting, and something it calls "infrastructure" (which is really a fancy way of saying "hardware" or servers). And somewhere in the mix, now, is quantum computing and, of course, artificial intelligence.

But, still... what exactly is IBM?

To prove that the company has no identity, I put the question out to my Twitter followers. Among the responses...

Maybe, but still, what is it … really?

After sitting there on live TV unable to answer the question, I went back and refreshed myself on what IBM claims to be… this time. After all, as that New York Times headline at the very top of this shows, IBM has been trying to change its image for decades.

Here's the irony, especially given the buzz surrounding artificial intelligence ("AI")...

IBM's supposed to be an AI company, and it's not just something it decided to be last week... or in the wake of the ChatGPT frenzy.

Ever since becoming CEO in April 2020, Arvind Krishna has said the company will focus on two things: the hybrid cloud and AI. He has said it over and over and over again....

It's the centerpiece of his turnaround plan.

Yet, until very recently, IBM has been left entirely out of the recent AI discussion.

It wasn't until last two weeks ago, in fact, that IBM became part of the broader conversation...

That's when Krishna made headlines saying that AI could replace nearly 8,000, or 30% of IBM's back-office jobs over time... so many that the company put a pause on hiring for those positions.

Then, a week ago, at its annual Think conference, IBM announced that in July it would launch WatsonX, which it describes as an "AI and data platform for businesses."

Here's the question, though... Is it too little, too late for a company that has had trouble getting investors to take it seriously?

And I'm not the only one wondering that. It's obvious to anybody who has been watching the stock, including Jeff Richards, who is a managing partner at a $9 billion venture capital fund. He responded to my question about IBM by saying...

That's right... While most other tech titans have blossomed over the past 15 years, IBM is stuck in the muck.

Its stock is pretty much where it was 10 years ago, in part due to one botched turnaround after another, while the tech-heavy Nasdaq is up more than 250%...

Not only does the company have an identity crisis, but the stock also reflects a crisis of credibility with investors.

Which is the opposite of its image in 2007...

That's when it rolled out an investor "roadmap" on how it would get its very adjusted earnings per share to a range of $10 to $11 by 2010. It hit that target one year early.

With investors lured in, it tantalized them with a revised "roadmap"... something I once referred to as "a highly effective investor relations marketing strategy." This time, the plan was to get adjusted earnings to $20 by 2015.

By now, IBM was on a roll. Not only was its stock was working, but its Watson supercomputer had become a celebrity, culminating with its appearance as a contestant on the TV show Jeopardy, where it beat legendary winner Ken Jennings.

That, it turns out, was peak modern-day IBM, at least on Wall Street.

It's unclear whatever happened to Watson, whose name was mentioned just once in the 2022 10-K, versus 72 times in 2016.

What is clear is this: Watson never quite lived up to its hype. Neither did its second go-round of the revised investor roadmap, which was ditched in late 2014 after earnings started to sputter and the 2015 target was deemed unreachable.

Coincidentally (or not!) that was a few years after then-CEO Sam Palmisano – the CEO two CEOs ago – retired...

His retirement is important because he first announced it in 2011, a few months after the 2015 "roadmap" was first unveiled. I was at CNBC at the time and happened to be working the "breaking news" desk that day... so I delivered the news to the camera, and cracked something along the lines that he was probably getting out while the getting was good.

As it turns out, the stock started rolling over within a year or so of his departure...

Since then, IBM has been trying to find its way, and trying has been dangling a fat dividend and share buybacks in front of investors. But the buybacks have akin to throwing good money after bad, as its stock has done absolutely nothing.

Meanwhile, no matter what the company reports, forensic accountants and analysts always seem to have a field day with IBM's numbers. As Bill Whiteside and Jeff Middleswart of the Behind the Numbers research service told me...

You could focus on a new topic every week about IBM's accounting quality, short-lived earnings gimmicks, setting up easy guidance targets and never run out of new items to discuss. 

Which gets back to the question... what does IBM really do? Back to Twitter...

Bada boom!

Before we go, there is another side to this story...

I've done this long enough to know that there are times new management and turnaround plans can transcend accounting and earnings quality issues.

That's what my friend Eric Fry is counting on with IBM. Eric writes Fry's Investment Report at InvestorPlace – a sister publication to Empire Financial Research. (You can check out his publication right here.) He has a great track record, and he's betting that if IBM can execute on its plan, it's a bargain here. As he told his subscribers last month...

The company is on track to earn about $9.50 per share this year and more than $10 in 2024, while also paying a hefty 5.1% annual dividend.

If IBM achieves EPS of $10, it would be selling for about 13 times earnings. That valuation would be about 35% below the P/E ratio of the S&P 500 Index, of which IBM is a member.

If he's right, it might not matter that most people don't know what IBM does, or even if its accounting quality is funky, as long as its turnaround is real. Stranger things have happened.

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(I write two investment newsletters for Empire Financial Research, Empire Real Wealth and Herb Greenberg’s Quant-X System. For more information, click here and here.)

Feel free to contact me at herbgreenberg@substack.com. You can follow me on Twitter Herb Greenberg