International Business Machines Corp. (NYSE:IBM) seems to be a classic case of a mega company that cannot seem to find ways to revive growth.
Investors have already been discounting IBM for growth concerns, with the stock off about 14% during the past year. Granted, the company is making some smart moves to get things on track, but the results could easily take a few years to move the needle.
And yes, the recent IBM earnings report is another indication of the issues at the company. In the first quarter, revenues plunged 12% to $19.6 billion. However, the results were severely impacted by the soaring dollar (about two-thirds of overall revenues come from overseas markets). There was also the negative impact from recent divestures of non-core businesses.
When taking those factors into account, revenues were flat on a year-over-year basis. Not terrible, but not exactly good, either.
And such adverse trends could be more than temporary. Let’s face it, the dollar may remain a problem if interest rates increase in the U.S. At the same time, IBM will probably continue to unload assets, which will probably result in more earnings charges and losses of revenue streams.
Yet the biggest issue for IBM is that the company’s main businesses are showing their age. The software business — which came from an aggressive M&A strategy – remains mostly stuck with traditional approaches.
There’s also the IBM consulting business, whose bookings have stalled. The fact is that the market is extremely competitive, with mega players like Accenture Plc (NYSE:ACN).
IBM Stock: The Good News
But not everything is going wrong at IBM. There are some encouraging developments at the company — just look at the mainframe business. This type of technology has proven extremely useful for high-transaction processes like mobile and cloud computing.
IBM also has many other initiatives that are showing promise. For example, its cloud computing division saw a 75% spike in revenues to $3.8 billion in the quarter. IBM has leveraged its big advantages of global scale, security and analytics to quickly become a major player in the market.
The Watson system, which allows for next-generation artificial intelligence, could also be a big winner. To this end, IBM recently launched a version for the health care industry, involving partnerships with companies like Apple Inc. (NASDAQ:AAPL), Johnson & Johnson (NYSE:JNJ) and Medtronic PLC (NYSE:MDT). The idea is that IBM Watson could generate lots of valuable insights on new medicine through the use of Big Data analytics.
IBM also launched a platform to capitalize on the emerging category of the Internet of Things (IoT). IoT is where mobile and cloud technologies are embedded in wearables, cars, highway sensors and so on.
Bottom Line for IBM Stock
All of this sounds great, but the problem is that these growth areas account for only about 27% of revenues, and IBM projects them to reach about 40% by 2018. Unfortunately, this means that the bulk of revenues will still be mostly in old-line categories.
That’s a problem for IBM stock.
After all, there are many other tech companies that are benefiting from megatrends like cloud, mobile, Big Data, IoT and social media. But they’re not dragged down by legacy businesses.
In other words, IBM stock could languish for some time, unless it can find a way to accelerate its transition. But given the massive size of the company — more than 400,000 employees, for example — this seems all but impossible.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
