On Monday, International Business Machines Corp. (NYSE: IBM, Rated “C”) reported third-quarter financial results. They were terrible, again. The continued travails of Big Blue should be a lesson for investors: Leadership counts.
In my opinion, the one-time blue-chip company has been doing everything wrong for a decade. Despite earning the most innovation patents year after year, IBM executives have never been able to build competitive advantages in any of the most important digital technologies.
It’s a “me too” business in an era of when leadership counts more than ever.
Managers announced a week ago that the Global Technology Services division would be spun off into a standalone entity, allowing IBM to focus on its cloud business. Managers even claimed Monday that IBM had a leadership role in the hybrid cloud, a $1 trillion opportunity.
Hybrid clouds are a combination of the public cloud and clients’ private servers. Hybrid providers bridge the gap with software that allows the clouds to communicate seamlessly.
Competition in the hybrid-cloud market will be extremely fierce.
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Microsoft Corp. (Nasdaq: MSFT, Rated “B”) is in a unique position to dominate this part of cloud infrastructure because the Redmond, Wash. software giant has a large public cloud and deep ties to enterprise clients stemming from its productivity dominance.
In terms of cloud infrastructure, Gartner, Inc. (NYSE: IT, Rated “C”) places IBM in the niche category, above Tencent Cloud and below Oracle Corp. (NYSE: ORCL, Rated “B-”). Neither of these companies are even in the same quadrant as Amazon Web Services, Microsoft Azure or Google Cloud, the infrastructure leaders.
The problem with IBM and other legacy companies is that they don’t have leadership roles in any of the emerging technologies enterprises are seeking.
IBM’s Cloud and Cognitive Software business is not remotely competitive with Microsoft. With only $5.6 billion in sales during the quarter, up 7% year-over-year, it’s a relative pipsqueak.
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The other divisions are not much better.
The Global Business Services group, a unit consisting of consulting, application management and processing services, competes with Accenture plc (NYSE: ACN, Rated “B”). GBS reported flat revenues of $3.9 billion during the quarter. By comparison, Accenture reported $14 billion in bookings when the company reported fourth-quarter results in September.
Despite my criticism, my intention is not to bash IBM.
Understanding what businesses are positioned best and why opens up great opportunity. On the opposite side, it’s important to know when big names aren’t well positioned and how to avoid getting swept up in name recognition at the cost of that opportunity.
It’s far easier to be successful as an investor if you weed out the flash and have a focused list of great businesses to buy when they go on sale.
Best wishes,
Jon D. Markman
