IBM’s struggles in the cloud computing era


International Business Machines Corp. (IBM) has thrown in the towel. After reporting disappointing third-quarter numbers, the company gave up a long-time earnings target of $20 dollars per share.

IBM’s CEO Virginia Rometty told analysts that it is time for the company to “reinvent” itself for the era of cloud computing services.

 

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Cloudy outlook

Barry Randall, who oversees the Crabtree Technology portfolio, sees big challenges ahead for Big Blue. Here’s his take.

IBM’s basic problem is that the current move to the cloud is deflationary. Twenty years ago, when the technology migration was from the mainframe to client/server computing, IBM adapted by emphasizing services and software, for which profit margins were stable or even growing.

Moreover, even though the mid-1990s hardware was cheaper than ever owing to Moore’s Law, hardware manufacturers, including IBM, still competed for business based on real or perceived technology superiority.

And the needs of the Internet and its immense need for not only computing power but also data storage meant that the total dollars spent were larger than ever.

Now, high performance computing has been almost completely commodified, so much so that putatively non-hardware vendors like Facebook (FB) and Google (GOOG) build their own servers using off-the-shelf hardware running Open Source server and networking software.

So IBM can’t move to the Cloud and hope that the dollar amounts will be the same.

Cloud computing is at its core a utility and for a utility, the primary values are reliability, predictability and low total cost of ownership. These are vastly different than the traditional technology values of productized innovation and a continuous cycle of technology upgrades.

To IBM, “services” typically means holding a clients’ hands while they install IBM products and a phone number to call when things go wrong.

But Cloud Services mean simply a computing infrastructure for which a client pays a low monthly fee and expects never to call the vendor again.

And thanks to a vicious price war among Amazon (AMZN), Google and other cloud service vendors, Cloud services are cheap and getting cheaper all the time.”

 

Continued learning: How the bust at GT Advanced Technology offers up a stark warning for investors.

DISCLAIMER: The investments discussed are held in client accounts as of September 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

Author profile

Barry Randall
Barry Randall
Crabtree Asset Management invests in growing technology companies. Barry Randall is the firm's founder and chief investment officer. He has more than 20 years of professional investing experience.

Barry spent five years as a technology stock analyst and 10 more years managing mutual funds that focused on small-cap and technology stocks. He has experience managing mutual funds and separately managed accounts as large as $650 million. Prior to earning his MBA in 1993, he spent six years as a professional computer programmer.

Barry earned a Wall Street Journal 'Category King' award for his co-management of a small cap mutual fund in 2006.

As of September 2017, Morningstar rated the Crabtree Multi-Cap Technology composite, of which the strategy offered at Covestor is a component, as having Four Stars for trailing 3-year, trailing 5-year and Overall

Barry has been quoted regularly in Forbes, US News & World Report, TheStreet.com and E-Commerce Times. He has appeared on CNBC, Bloomberg TV and Fox Business News.

Crabtree Asset Management LLC was founded in 2008 and is headquartered in Saint Paul, Minnesota.