It's not too late for Warren Buffett, or any other risk-adverse IBM shareholder. Get out now and don't look back. IBM's (IBM) business model no longer fits the competitive environment, as I've explained in multiple columns. This is a train wreck that everyone should see coming.
I'll explain IBM's core problem, warn investors from the stock one more time, then I'll turn it into a positive. I'll tell you about the opportunity embedded in the IBM story. No, it's not in betting against IBM per se. It's about disruption at the business model level, and the stock picking opportunity that results.
On IBM: The decline in revenue is worse than it appears. About two-thirds of the revenue base is derived from locked-in contracts (recurring revenue). If you do the calculation, netting sales growth from acquisitions against variable revenue, you'll see what I see: IBM's core business is shrinking organically at an alarming double-digit rate.
It's unsustainable, of course, indicative of a flawed value proposition. If customers are happy with IBM, why are they bolting for the door?
IBM's model needs re-imagining, and from the ground up. Selling bundled contracts is not viable long-term in enterprise IT. They are too damned opaque, for one thing. Bundling hardware, software and services - let's be honest on this - is way to squeeze as much margin out of the customer as possible. You know, what you can't really see, you can't really object to.
The competition has something that appeals to IBM's core customer. No more long-term, bundled contracts. No more big, upfront capital outlays, followed by high maintenance fees. The $3.7 trillion IT industry has been turned on its head, with computing power now commoditized and abstracted; even its delivery model is changing, from on-premise to off-premise.
If you're an IBM shareholder, you don't need to agree with me that the vast majority of IT eventually moves to the public cloud. Such a debate distracts from the core issue - IBM's viability. Even a small incremental move to the low-margin cloud makes IBM's captive, high-margin model untenable.
IBM's story is also the story of the market
There's a revolution ongoing at the business model level. Massive disruption in one industry group after another - from print media to retail to automobiles (Tesla, woohoo!) to information technology.
Mary Meeker put investors on notice: Profound disruption at the business model level will affect most industry groups. I'll take it a step further: There are only two types of verticals for investors to think about: Those that are being disrupted, and those that are going to be disrupted.
The economic pie is growing in value, but how will the pie be divided up? In one vertical after another, all we can say is this: The market is up for grabs. It's a free for all. To a skilled stock picker, you can't conjure up a better environment. This is as good as it gets.
(Go here if you'd like to see my stock picks.)