For quite a while now, I've been following IBM Corp. (NYSE:IBM) and trying to find the value angle. It's so statistically cheap - and so universally regarded as an out-of-touch dinosaur despite its rapidly growing Cloud and Big Data businesses - that I've hoped that, at some point, I would see some signs of life.
Sadly, I still haven't noticed any; I've discussed before why IBM's financial results suggest it still has no clue how to adapt to a rapidly changing world that has eliminated the value proposition for many of its legacy offerings (middleware, big iron, and so on). As I was reading over a recent transcript of the company's presentation at the J.P. Morgan conference, I may have figured out key one of the reasons why.
IBM Doesn't Listen To Its Customers
At the conference, CFO Martin Schroeter spent a lot of time talking about how awesome IBM's product suite is - and he was so busy talking about the company's perspective on this, that, and the other that he just plain forgot to spend much time going into what critical gaps customers have in their IT infrastructure and what IBM can do to fulfill those needs. The tone was very imperialistic - we're IBM, here's our view of how the world needs to be, and you'll get on board because we're smarter than you.
That may work if you're Apple (NASDAQ:AAPL) and can generate a perpetual premium for slapping a shiny logo on a product, but without that sort of cult brand power (which IBM clearly no longer has), you have to win by actually delivering on customers' expectations. Indeed, contrast the company's self-centered approach to the tone from high-performing, universally well-regarded organizations such as Salesforce (NYSE:CRM) or Amazon (NASDAQ:AMZN).
See the transcripts here and here, for examples. Even if you hadn't read the biographies of Marc Benioff and Jeff Bezos - which you should, they're awesome - reading those transcripts alone would be enough to give you a sense of the genuinely customer-focused nature of Salesforce and Amazon.
IBM has lost major contracts due to its inability to deliver what customers want. I've previously referenced the embarrassing CIA contract loss to Amazon, and besides the fact that IBM's technology was woefully inadequate, one of the other factors that caused the company to lose was that it didn't properly follow the bidding process.
Acquisitions To Nowhere?
Perhaps the most frustrating part of the IBM story is that the company hasn't been shy about putting money where its mouth is - in the last twelve months alone, it has spent over $9 billion buying companies in emerging areas to bolster its platforms in area like cognitive computing and cloud video. Yet, growth in these areas has yet to offset the declines in legacy business, and IBM continues to underperform the already low expectations set by both its own management and the analyst community.
This is inexplicable until you factor in the above - if IBM is putting together a platform that matches its own internal vision of the future of IT (rather than what its customers want), then it's going to be a long, sad, expensive road to nowhere for the company's shareholders.
Final Thoughts
The irony here is that for quite a long time, the company actually survived - thrived, even - by listening to its customers. Yet, management commentary and financial performance increasingly suggests it is no longer taking that approach, and even if the company changes its ways, you can't build technology platforms overnight.
Buffett's IBM buy was clearly a mistake, and I think a purchase at the current price will prove to be one as well. Until and unless IBM can demonstrate that it is listening to its customers and has what it takes to compete in the new world of IT, it's going to be hard for the company to drive revenues, earnings, or the stock price.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
