IBM: Shareholders Must Prepare For An Ideological Shift

seekingalpha2021-11-15

Summary CEO Arvind Krishna is retooling the company from a lethargic legacy business to a growing cloud behemoth. Investors must begin to re-rate IBM and can no longer look at the company as a blue-...

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精彩评论

Ong2021
2021-11-15
Ong2021
[Smile]
- Ong2021:
  [What]
infinite88
2021-11-15
infinite88
$IBM(IBM)$might not be lagging as much as Ithought... may be a value buy when other competitors appear overvalued
- kungpao:
  agreed
Bizkit
2021-11-15
Bizkit
✌
- PrimRose:
  A

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When former CEO Ginni Rometty stepped down from her post, and Arvind Krishna took over, he promised a return to the strong growth days of IBM's past. Let's see how well Krishna has delivered on his promise and where the company is trending under his leadership.\nThe Move To Growth\nKrishna has taken a \"retooling\" strategy to shift the company's strategy to growth. The company was already in AI and cloud, however, this wasn't the main focus of the company, nor was it the leading driver. Thus comes the move to spin off Kyndryl (KD), IBM's managed infrastructure business.\n(NewCo was the temporary name before Kyndryl)\nOnce its largest revenue generator, the move was initially unwelcomed by conservative shareholders simply looking to capitalize on the protection IBM's yield provided. However, recent regulatory filings show why the move was necessary, not only for Krishna's growth strategy but also to give a significant cash flow boost. Kyndryl's revenue has decreased by nearly 11% since 2018 from $21.8B to just $19.35B, additionally, net loss more than doubled since 2019, from $943M to now $2.01B with gross margins declining from a high of 12.8% in 2019 to just 10.3% as of the previous quarter. Declining revenue and increased losses are not going to cut it for a company targeting growth or even one trying to return value to shareholders through strong cash flow generation.\nOn the other side of IBM's mission to spin off its legacy businesses comes acquisitional growth. It starts with Red Hat, the open-source enterprise company that IBM integrated into its hybrid cloud. Although the purchase came under Rometty, Krishna is credited as the architect of the extremely strategic deal.\nSource: IBM Investor Briefing 2021\nUsed by 94% of the Fortune 500, not only was IBM able to expand its customer base but also through its established cloud business, Red Hat was able to see 43% revenue growth going from $3.5B to now $5B in revenues. Out of all the sub-sets within IBM's cloud business, Red Hat is leading and as the company continues to shrink its focus on the growth avenues of cloud & AI, the \"Red Hat\" effect is sure to be seen everywhere.\nAnother consequential acquisition under Krishna was Turbonomic. The enterprise software company helps in the digital transformation process by simulating supply and demand trends beforehand such that businesses can efficiently allocate their resources across the cloud. Not only are automation abilities that Turbonomic can add to IBM's cloud attractive, but the fact that they work with almost 1/3 of the Fortune 500 helps IBM meaningfully expand their exposure within top companies. Combined with other enterprise offerings like Red Hat, more and more companies will be forced to spend on IBM products, providing them with a strategic competitive advantage and pricing power.\nIt should be noted that Red Hat and Turbonomic are just the two largest deals IBM has announced under Krishna. The CEO has made a flurry of other deals including Spanugo: a cloud cybersecurity company; WDG: a robotic process automation company; and Nordcloud and 7Summits: both of which are cloud consulting companies, just to name a few. As IBM zones into the cloud & AI, new growth avenues have opened up, including data fabric opportunities and automation. Many of these acquisitions are helping the company inorganically take advantage of the growing cloud space.\nIn addition to spinoffs and acquisitions, the company has made an effort to organically grow through heavy investments in the R&D space.\nSource: Created by author using data from Stock Analysis\nIn 2020, the company hit a new record for R&D expense at nearly $6.3B, and 2021 looks to be even higher as Q2 set a new quarterly R&D expense record just north of $1.65B. This once again reflects Krishna's desire to hyperfocus the company on growth within the cloud & AI businesses. From both an inorganic perspective through a variety of deals and an organic perspective through investing in new technologies, we are in the first stages of what looks like a new era for IBM.\nThe Cost of Growth\nHeavy investments in the growth and reshaping of IBM have hit profitability in a big way. In Q2, IBM claimed to have a \"strong balance sheet and liquidity\" position, however, data indicates otherwise.\nSource: Created by author using data from Stock Analysis\nAt the most basic level, we can see that total liabilities hit a new record during Q4 of the previous year at $135.2B, and continue to remain at elevated levels for the company. Additionally, debt has more than doubled, with much of this coming through Krishna's all-important Red Hat acquisition in 2018 and 2019, which has spearheaded his growth strategy.\nSource: Created by author using data from Stock Analysis\nTaking a deeper look we see that the debt-to-equity continues to trend higher, staying above the historical average, indicating that IBM continues to incur debt to finance its growth. This is further validated by the highly leveraged balance sheet which sits at the third-highest level in company history at a whopping 3.23x.\nSource: Created by author using data from Stock Analysis\nIBM's long-standing dividend growth has also been impacted, slowing to just 1.24% this past year. With the company increasingly inclined to pour cash into things like R&D, M&A, or even paying off their ballooning debt, don't be shocked if dividend growth stalls at this level or the dividend itself is cut in favor of internal developments.\nA New Outlook\nNow, at face value, high debt, high leverage, and a slowing dividend sounds like a company is trending in the wrong direction; however, for IBM we believe these things are necessary. If the company wants to deliver on Arvind Krishna's goal of growth, the time to spend money on fast-growing companies is now. The time to put cash into R&D to develop new product solutions is now. The time to consolidate the business to only high growth verticals, regardless of the costs it incurs, is now.\nToo long have shareholders been disappointed by declining revenue and profit figures. If the company wants to generate long-term value and keep up with the increasingly competitive technology space, they need to focus on growth at all costs. Red Hat and Turbonomic should only be the start for Krishna as he must continue to make key acquisitions to justify the deteriorating balance sheet.\nWith this new direction that IBM is taking, the stock itself also needs a re-rating. We can no longer look at the company as a blue-chip dividend growth company rather one that is in the midst of a transition towards double-digit growth. And through the lens of a growing tech company, not only does the opportunity presented by Red Hat and other acquisitions look attractive, but the balance sheet also looks investable.\nSustainability\nAt North Post Research, we have recognized the importance of valuing companies not only by traditional metrics, but also by their Environmental, Social, and Governance (ESG) goals. In addition to our analysis, we will be adding a sustainability scorecard that grades the beliefs and initiatives of each company. IBM's full sustainability report can be foundhere. Its total average score was 9.33.\nEnvironmental: 10/10\nIBM's multifaceted approach for creating good tech for the environment is one of the best in the industry. The 6 step process includes providing climate and infrastructure risk management, which uses IoT data and AI analytics to create predictively CO2 and waste generation models that help businesses develop sustainable solutions from the bottom up.\nThese efforts have resulted in a 56.6% reduction in CO2 emissions across all platforms. To put this into perspective, IBM was targeting a 40% reduction by 2025, meaning they crushed their goal by double digits 5 years early, that's simply unheard of.\nAnother point of emphasis for the company has been making greener, more traceable supply chains. Their Blockchain Transparent Supply product offering allows for business and supply chain partners to create a data-sharing ecosystem to ensure that products efficiently get from Point A to Point B.\nThese solutions have led to practical impacts from a business and consumer perspective. Take the Norwegian seafood industry, one that has been reeling due to a lack of trust by consumers for the under-regulation and fraud in aquaculture. To turn things around, IBM partnered with Atea, an IT solutions company in the Nordic region, and helped exporters implement traceability solutions using blockchain technology. This means that any supplier that the seafood exchanges hands with has a permanent record entered into a ledger. Any company across the supply chain can access the ledger alongside key data points like where the seafood came from, what was done to transport it, and a number of other statistics. The entire process has worked to create accountability across the supply chain and companies have likely seen numerous benefits from increased revenue and profitability to a more trusting consumer.\nIBM earns a perfect score for its sustainability efforts and using technology to foster a greener society.\nSocial: 10/10\nThe tech giant's social impact starts with its scalable education initiatives which have led to practical benefits for many. Have you ever heard of a school that provides students with a high school diploma, an associate's degree, specialized career training in a growing field, as well as real-world opportunities at top companies? Well, IBM's innovative P-Tech educational model has made waves by efficiently developing students into high-achieving leaders. The program spans 28 different countries and has reached thousands of students in 260+ schools it serves. With more schools scheduled to be added to this growing list, the impact that the program can have is astronomical.\nIBM's STEM for Girls initiative has also seen a similar trend. Initially started in 2019 to help young girls in rural India, the program has now globally expanded to 8 new countries and engaged over 140,000 women, providing them with career pathways and opportunities in STEM-related fields.\nMoving on to company inclusion and diversity, IBM is hitting it out of the park. For the 19th consecutive year, they scored a perfect score on the Human Rights Campaign (HRC) Corporate Equality Index. The overall company is well-renowned as one of the champions of equal opportunity as outlined in their Equal Opportunity Policy and takes pride in its rich cultural history. With one of the most creative women in tech, Ginni Rometty, as a former head, and now an Indian-America, Arvind Krishna, leading the company we are confident they will continue these policies.\nFor their consistent social policies, IBM earns another perfect score.\nGovernance: 8/10\nOne of IBM's core principles is ethically using technology to work in the best interest of clients. To improve the transparency for the AI-based solutions, IBM's research division created \"AI Factsheets\" which guide companies on how to most efficiently use product offerings to optimize their business. These factsheets are slowly being integrated into Watson to create a scalable, personal, and trustworthy AI that any company can take advantage of.\nIBM is also leading the global charge to accelerate the adoption of inclusive AI by being one of 100 companies participating in the Global AI Action Alliance (GAIA). By working towards creating an ethical technological learning community through GAIA, as well as CEO Arvind Krishna serving on one of the committees of the community, IBM truly embodies the meaning of sustainable technology.\nFrom Ginni Rometty to Krishna, the constructive and innovative company culture hasn't missed a beat, if anything it has been further reinforced. Our only complaint regarding IBM is the amount of cybersecurity information they disclose. We believe all tech companies, especially ones like IBM which manage a significant amount of data through their AI and cloud services, need to release a public cybersecurity report that details the current state of breaches, potential attacks, and what is being done to keep clients safe. Although this cuts 2 points from the company's score, the strong, ethical governance structure should be a model for others in the industry.\nTakeaways\nAs IBM continues to consolidate and hone in on its true core business, a long runway of growth awaits it. With shares down almost 20% from all-time highs, we believe now is a perfect time to average down or initiate a position in this portfolio keeper.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":873214566,"gmtCreate":1636946973811,"gmtModify":1636946973889,"author":{"id":"4087873768935830","authorId":"4087873768935830","name":"Ong2021","avatar":"https://static.tigerbbs.com/eec6b0f9969a9aab1913945a2c49ea24","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"4087873768935830","authorIdStr":"4087873768935830"},"htmlText":"[Smile]&nbsp;","listText":"[Smile]&nbsp;","text":"[Smile]","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":1,"repostSize":0,"link":"https://laohu8.com/post/873214566","repostId":1132857367,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":6581844,"gmtCreate":1636946987490,"gmtModify":1636946987588,"authorId":4087873768935830,"author":{"id":4087873768935830,"idStr":"4087873768935830","authorId":4087873768935830,"name":"Ong2021","avatar":"https://static.tigerbbs.com/eec6b0f9969a9aab1913945a2c49ea24","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":873214566,"type":1,"supId":0,"prevId":0,"content":"[What]","text":"[What]","html":"[What]"}],"langContent":"CN"},{"id":873232703,"gmtCreate":1636945461359,"gmtModify":1636945461519,"author":{"id":"4097069331028630","authorId":"4097069331028630","name":"infinite88","avatar":"https://static.tigerbbs.com/9c85f8bc6e087b5c8fe1e54a45cd27a5","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"4097069331028630","authorIdStr":"4097069331028630"},"htmlText":"<a href=\"https://laohu8.com/S/IBM\">$IBM(IBM)$</a>might not be lagging as much as Ithought... may be a value buy when other competitors appear overvalued&nbsp;","listText":"<a href=\"https://laohu8.com/S/IBM\">$IBM(IBM)$</a>might not be lagging as much as Ithought... may be a value buy when other competitors appear overvalued&nbsp;","text":"$IBM(IBM)$might not be lagging as much as Ithought... may be a value buy when other competitors appear overvalued","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":1,"repostSize":0,"link":"https://laohu8.com/post/873232703","repostId":1132857367,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":6581613,"gmtCreate":1636945721109,"gmtModify":1636945721142,"authorId":3575091423649914,"author":{"id":3575091423649914,"idStr":"3575091423649914","authorId":3575091423649914,"name":"kungpao","avatar":"https://static.tigerbbs.com/f469169ddf2122a6445250fcaea5382c","vip":1,"crmLevel":7,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":873232703,"type":1,"supId":0,"prevId":0,"content":"<u>agreed</u>","text":"<u>agreed</u>","html":"<u>agreed</u>"}],"langContent":"CN"},{"id":873296464,"gmtCreate":1636944255551,"gmtModify":1636944255606,"author":{"id":"3575446223809245","authorId":"3575446223809245","name":"Bizkit","avatar":"https://static.tigerbbs.com/1f426eca913ede411e4912f7589cb4ee","vip":1,"crmLevel":6,"crmLevelSwitch":0,"idStr":"3575446223809245","authorIdStr":"3575446223809245"},"htmlText":"✌","listText":"✌","text":"✌","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":1,"repostSize":0,"link":"https://laohu8.com/post/873296464","repostId":1132857367,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":6581402,"gmtCreate":1636944613243,"gmtModify":1636944613272,"authorId":3576844665898559,"author":{"id":3576844665898559,"idStr":"3576844665898559","authorId":3576844665898559,"name":"PrimRose","avatar":"https://static.tigerbbs.com/4749cd07ab1dd160b3c1f4da91927ff6","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":873296464,"type":1,"supId":0,"prevId":0,"content":"A","text":"A","html":"A"}],"langContent":"CN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":77,"commentSize":3,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; 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