NASDAQ euphoria continues, with the traditionally dour month of October seeing nothing but sunny skies. Google (GOOG) blew through the $1000 mark, and Apple (AAPL) is beginning to intrigue reluctant stock buyers with impending Tablet futures. Through these sanguine events and the broader cheer around Tech, IBM plods along dourly, after having taken a hit over the last two months. The stock is down 10% since I (correctly) predicted its downturn from the $190's a couple of months ago.
Given the cliche of price is what you pay, value is what you get - there is a 'right' price at which a sell becomes a buy. Given that IBM is now down to its Buffett price (see above), is this a good time to pull the trigger and buy? I share 3 reasons for the 'not quite yet' hypothesis - with the caveat that IBM is worth watching over the next quarter for a profitable buy point.
China. China is a 5% market for IBM. 40% of that market is hardware sales. Hardware revenue is awful across the board, due to the challenge of cloud-based solutions. It is awful in China as well, with revenue down 17% and a strategy reset that might take several quarters (thinking optimistically). Not helping matters is that this slump is in the midst of China revising its economic (and technology) plans.
Government Shutdown. The government shutdown did more than inconvenience weary travelers at airport security lines. It will particularly hit Q4 earnings of companies for whom the government business is significant, and this list goes beyond traditional government contractors. While IBM corporate communications has underplayed the impact of a government shutdown, the 'share of revenue pie' chart below paints a more concerning picture.
Valuation. You could use the Buffett Price and some technical support in the $170's to make a case for a buy trigger at this price. What's concerning is the combination of the fact that the stock is threatening to break down on a technical basis, along with the fact that its EV/EBITDA numbers look expensive (see below). Back when IBM was in the sweet spot of Hardware plus Services, the high EV/EBITDA valuation was justified. But given its current woes, does it deserve a premium over EMC and Oracle (ORCL)?
In short, this is not an outright bearish article on IBM as much as a cautionary one. IBM is showing holes in its execution that might prompt a fundamental change in valuation. There are no upside catalysts that would take it up 10%, but there are things that could send it to its support in the $150's. In my opinion, it would pay to wait and see how the above factors impact the next quarter before pulling the trigger.