Seeking Alpha

IBM falls as Druckenmiller makes short case

  • Hedge fund manager Stanley Druckenmiller has called IBM (IBM -1.5%) one of the "more high probability shorts" he's seen in years, and declares Amazon Web Services (AWS) is "killing" the IT giant.
  • He's also critical of Big Blue's slumping free cash flow, and its efforts to boost flagging growth via M&A.
  • AWS is expected to pull in less than $4B in revenue this year, but is growing at a rapid clip. In addition, analysts have argued every IT dollar eaten up by cloud services results in a greater amount of on-premise IT spend being lost.
  • IBM recently bought Web hosting/cloud infrastructure provider SoftLayer for a reported $2B in order to better take on Amazon, as well as rivals such as Microsoft, Google, VMware, and Rackspace.
  • Though off its October lows, IBM remains down 5% YTD in a year during which the Nasdaq is up over 30%. Shares were hit hard last month by a Q3 revenue miss.
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Comments (28)
  • Tom Shaughnessy
    , contributor
    Comments (1149) | Send Message
    I guess the fact that IBM is actually profitable and undervalued does not correlate to Amazon's profitless growth.


    Second analyst on IBM in a month that I have seen. UBS analyst has it wrong too in my opinion.

    22 Nov 2013, 02:35 PM Reply Like
  • Yteeld
    , contributor
    Comments (1149) | Send Message
    Please remember how wrong you have been on Herbalife or did that slip your memory...................


    Why when pointing out the wrong of others did you omit your flawed research on Herbalife?
    22 Nov 2013, 05:00 PM Reply Like
  • Momintn
    , contributor
    Comments (5115) | Send Message
    What I'm wondering is if people understand that this is one man's opinion whose only education is a B of A. He knows nothing about technology.
    From Forbes, Stanley Druckenmiller closed down his $12 billion hedge fund, Duquesne Capital Management, in August 2010 and returned investors' money, citing frustration with his inability to deliver high returns. I read on Bloomberg that his annualized return was 9 to 10% for 2009 and 2010 when the stock market was booming. If he had invested in IBM on Jan 1 of 2009 then on Aug 1, 2010, he would have had an annualized return of 30.14%, and he wouldn't have had to close his fund. Clearly, he doesn't understand IBM's value or business.
    If you listen to him talk about QE he thinks that it is the only reason stocks have gone up and when QE ends he thinks the markets will completely go back down, and QE will have been a negative in the end. He is just another retired person living on a pension according to his own words, hyping his opinion on CNBC.
    Why would anyone listen to these old people on CNBC who favor their friends like Jeff Bezos? If you buy stocks like Amazon who have no earnings and pay no dividends, you may see your money vanish when QE ends, but IBM will hold its value and most likely rise in price as they buy back 10% of their shares. Druckenmiller is being disingenuous to others and so are many people who will sell you their trades.
    23 Nov 2013, 10:37 AM Reply Like
  • Workhorse Investor
    , contributor
    Comments (125) | Send Message
    Druckenmiller also recently bought Nokia, Herbalife, and Amazon recently. In my opinion, these stocks belong in the waste bin when compared to IBM.


    I'll be buying IBM along with Buffett--and I hope it falls more.
    22 Nov 2013, 02:43 PM Reply Like
  • joeycard
    , contributor
    Comments (326) | Send Message
    Catastrophic for thé DOW
    22 Nov 2013, 02:44 PM Reply Like
  • philippemessier
    , contributor
    Comment (1) | Send Message
    "Stanley Freeman Druckenmiller is the former Chairman and President of Duquesne Capital, which he founded in 1981. He closed the fund in August 2010 because he felt unable to deliver high returns to his clients."
    22 Nov 2013, 02:52 PM Reply Like
  • ThetaDecay
    , contributor
    Comments (106) | Send Message
    He ran the fund for 18 years, and from 1981 to 2007 he achieved annualized returns of over 30%. His last two years came in at 19% and 10%. Before that, he was also involved in one of the greatest shorts of all time, breaking the Bank of England with Soros.


    To imply that this guy doesn't have credentials is laughable.
    22 Nov 2013, 04:24 PM Reply Like
  • Momintn
    , contributor
    Comments (5115) | Send Message
    The guy is old and does not have any technology experience at all. He knows nothing about the cloud or he would realize that IBM has more cloud data centers with their own hardware installed as well as more websites, and most of the leading companies. And he isn't a very good money manager if he hasn't realized that Amazon has not made any money on their cloud venture. He is just another trader trying to make himself money by using the media. According to the Wall Street Journal, on August 18, 2010 Druckenmiller "told clients that he's returning their money and ending his firm's 30-year run, citing the 'high emotional toll' of not performing up to his own expectations." He indicated it was not easy to make big profits while handling very large sums of money.
    23 Nov 2013, 09:52 AM Reply Like
  • ThetaDecay
    , contributor
    Comments (106) | Send Message
    Uh, no. Druckenmiller clearly does understand tech, as he made money during the tech bubble and through the tech crash. What on earth makes you think that you are smarter than this legendary investor?


    I wonder, would you call Buffet (who endorses IBM) an old guy who doesn't have any technology experience? He's 23 years older than Druckenmiller.
    23 Nov 2013, 12:21 PM Reply Like
  • Guest1234
    , contributor
    Comments (85) | Send Message
    I agree, to say that Stanley Drunkenmiller is an inept investor is completely ridiculous, I'm sure he understands tech and the cloud better than you do and if he doesn't I'm sure he knows people who could give him better input. Buffett investing in IBM? Didn't he always say that he would stay away from tech investments? If anything Drunkenmiller is has more experience in tech investing than Buffett and is younger. Berkshire Hathaway is not a hedge fund, plain and simple, they use their insurance float to go leveraged long (no short positions) so it is easy to see why they would post better gains than a long short hedge fund (I guess simple people would not understand this).
    23 Nov 2013, 04:38 PM Reply Like
  • xeys_00
    , contributor
    Comments (76) | Send Message
    This guy probably bought puts prior to this statement.
    22 Nov 2013, 03:03 PM Reply Like
  • brianhutch
    , contributor
    Comments (328) | Send Message
    Druckenmiller is 100% correct.
    IBM real book value per share is minus $13 . Stock $181 ?
    IBM target south of $100
    22 Nov 2013, 03:59 PM Reply Like
  • Joseph Harry
    , contributor
    Comments (291) | Send Message


    I've noticed on a few occasions that you have referred to IBM's book value per share. Is there a reason you are using this metric to value a tech company like IBM, especially one that does extensive buybacks? Are you sure P/B is really a good way to value IBM?
    22 Nov 2013, 05:34 PM Reply Like
  • lildimsum7
    , contributor
    Comments (614) | Send Message
    The liabilities are probably from deferred revenues and are more like float, since they have good relationships with customers and suppliers. But still, Druckenmiller has a good point concerning M&A. I think they'll do okay in the long-run because they have tremendous amount of resources.
    22 Nov 2013, 07:35 PM Reply Like
  • Momintn
    , contributor
    Comments (5115) | Send Message
    I suggest you go look at some other companies book value that all the Fast Money crowd likes such as Lockheed Martin LMT which has a P/B of 35. Book value means absolutely nothing. Many of these large older companies have bought and sold so many companies as well as bought their own stock that it is meaningless. This has been explained on this same website numerous times.
    23 Nov 2013, 09:57 AM Reply Like
  • Benny.J.
    , contributor
    Comments (45) | Send Message
    My questions to Stanley


    - if most of IBM's revenue decline came from slow hardware sales in China, what does that have to do with AWS?


    - is AWS profitable? If so, we have to assume that Amazon's core business is wildly unprofitable. Isn't that a concern?
    22 Nov 2013, 04:46 PM Reply Like
  • samuraitrader
    , contributor
    Comments (882) | Send Message
    Insiders are agreeing with Stanley. They have stepped up the selling again.
    22 Nov 2013, 05:52 PM Reply Like
  • The_Hammer
    , contributor
    Comments (4530) | Send Message
    Not a bull on ibm but didn't Druck turn bullish at the peak of tech/internet in late 1999 after fighting off high valuations.
    22 Nov 2013, 06:36 PM Reply Like
  • slam stocks
    , contributor
    Comments (1431) | Send Message
    I trust Buffett more a Hedge Fund investor. You don't announce your decision if you want to make money. Buffett dropped $10B which is his largest investment since Burlington Railway and kept the purchase secret.
    22 Nov 2013, 08:31 PM Reply Like
  • Guest1234
    , contributor
    Comments (85) | Send Message
    Buffet's political machine guarantees the value of his oil shipping railcar businesses
    23 Nov 2013, 04:40 PM Reply Like
  • butchokoy
    , contributor
    Comments (58) | Send Message
    IBM will still be around for another hundred years. I don't think Amazon will make it to a hundred. The only smart thing about Jeff Bezos is that he always comes up with another idea when his previous idea doesn't seem to work out. Then the media will call him a genius:-)


    Today's investors are looking for the next big hit. The market has been very patient with Amazon. That's the reason why the stock is overvalued. One day, the investors who believe in Amazon will wake up and realize that Amazon cannot pull off selling goods with slim to zero margins to justify all that investor capital that Jeff Bezos' burned.
    23 Nov 2013, 02:53 AM Reply Like
  • Momintn
    , contributor
    Comments (5115) | Send Message
    What Stan Druckenmiller said on CNBC on Sept 19, 2013
    "I'm retired and living on a pension."
    23 Nov 2013, 10:10 AM Reply Like
  • dividend_growth
    , contributor
    Comments (2899) | Send Message
    Both are correct, but they differ in time frames.


    Buffett wrote way back in BRK's 2011 AR that the more IBM falls, the happier he will be.


    So it's shaping up to become a win-win situation.
    23 Nov 2013, 06:53 PM Reply Like
  • Mark Humphrey
    , contributor
    Comments (817) | Send Message
    I've been nominally short IBM for around a year at a higher price. The short's not big enough to make a difference either way, so I'm not claiming anything. I hope IBM rallies back to $195+ so I can short some more.


    I haven't taken time to study IBM to grasp the moving parts. But I've read from sources I trust it's a great company at managing accounting reports, it has lots of past acquisition mistakes to write off, its revenues are stagnant to slightly declining, its costs are rising, its cash flow declining, its tangible book value negative, its debt is substantial, its growth area (China) in trouble. The above doesn't rise to the level of analysis--its just my reasons for looking to short the stock.


    I am encouraged when I read comments 85% or so bullish on IBM. I'm glad that Stanley D. has validated my decision, even though I really don't know what I'm doing.


    Evidence of my amateur's staus: been short amazon for nearly two years, adding to at higher prices.
    23 Nov 2013, 08:03 PM Reply Like
  • chopchop0
    , contributor
    Comments (4224) | Send Message
    "Evidence of my amateur's staus: been short amazon for nearly two years, adding to at higher prices."


    23 Nov 2013, 11:34 PM Reply Like
  • 1GreatCFA
    , contributor
    Comments (1201) | Send Message
    Well I would agree strongly that a stock like IBM is well positioned as a defensive name even though and this is my main point I have difficulty seeing how they hit $20 EPS by 2015 and have only had more difficulty envisioning $20 if they have to take a large hardware write down. But defensive sure...I mean any triple digit stock is likely not to be susceptible to froth because a board lot of Big Blue is nearly twenty grand. But I repeat I happen to believe IBM and their business is maturing. $100 Billion in Revenues is only achieved a handful of times and by only the largest companies. I think this companies revenues continue to slip lower...not that $90 or $80 Billion is small potatoes but these are cyclical stocks and IBM is clearly having problems with governments and corporations dialing back on Hardware replacement. I would wait. I say IBM goes lower if Yellen doesn't tapper or raises stimulus since money will flow into more speculative names where as if he tappers then Blues div and credibility will likely prop it up while the rest of the market creators. I repeat I am having HUGE issues seeing how the hit $20 EPS in oh fifteen and even if it trades at 9x that's still $180 per share.
    23 Nov 2013, 08:42 PM Reply Like
  • RichAidan
    , contributor
    Comments (5) | Send Message
    Their engineering software products are the tools of choice for product development and continue to replace other vendors.
    24 Nov 2013, 04:42 AM Reply Like
  • chopchop0
    , contributor
    Comments (4224) | Send Message
    IBM has all sorts of neat things going. I don't think the share price reflects endeavors like Watson

    24 Nov 2013, 09:13 AM Reply Like
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