Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



IBM's Rare Miss Crushed the Dow Today

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Here's something you don't see often. Shares of IBM (NYSE: IBM  ) have fallen as much as 7.7% today on an earnings miss -- an event as rare as chicken lips. The stock's plunge took more than 100 points off the Dow Jones Industrial Average (DJINDICES: ^DJI  ) index, dragging the blue-chip index into the red today despite the gains being made by 25 of its 30 components. The Dow's price-weighted nature magnifies IBM's every move, and today it's working against the index.

The company is usually as reliable as time itself. Big Blue hasn't missed Wall Street's earnings targets since 2005, for crying out loud. Yet it did this week.

First-quarter sales fell 5% year over year to $23.4 billion. Non-GAAP earnings increased 8% to $3 per share but still fell just short of analyst targets of $3.05. As if that didn't hurt enough, management held full-year targets steady but lowered guidance for the second quarter. Business is supposed to pick up again in the back half of 2013.

Orders from the U.S. government fell 13%, at least partly due to the sequester action in the first quarter. IBM also expected Chinese government orders to come in weak but forgot to account for ripple effects among businesses owned by the Chinese state and various provinces and cities. IBM's CFO called this China syndrome a "once every 10 year event," and it was exacerbated by a weak yen. In other words, IBM doesn't expect that particular headwind to come back anytime soon.

But IBM won't just rest on its laurels and hope for the best. Management is taking some drastic action to turn things around. That's the good news. The bad news is that I'm not sure Big Blue is making the right moves.

These System P servers may be moving to China soon. Source: IBM's news room.

IBM's business model has long been an archetype for the enterprise computing industry. Its top-to-bottom combination of hardware, software, and services is the envy of Silicon Valley. Networking giant Cisco Systems (NASDAQ: CSCO  ) added a server division in order to get closer to the IBM ideal. Oracle (NYSE: ORCL  ) walked further down the same path when it acquired Sun Microsystems. And the list goes on.

It's not an easy path to follow. Cisco's server sales are finally gaining some traction, four years after it entered the market and scared away several longtime partners. That's a long and painful road, even if the potential payoff is great. I'm not at all sure that Oracle is getting its money's worth for the $5.6 billion it spent on Sun. Hardware sales have dwindled to $671 million in the recently reported third quarter, down from a quarterly peak of $1.2 billion in the summer of 2010. Many rivals find their way to the IBM model, but only Big Blue truly knows how to make it work.

But systems-builder magazine CRN reports that IBM is about to sell its mid-tier server operations to Lenovo, only a decade after it sold its consumer systems division to the Chinese titan. Lenovo has confirmed that it's discussing a major acquisition with somebody, though nothing is writ in stone quite yet. But it does seem that IBM is about to strip off an important part of its corporate identity.

That would instantly dismantle IBM's trend-setting top-to-bottom business model. The synergy value of its software and services will be diminished. Like I said, I don't like this idea at all.

Once a highflying tech darling, Cisco is now a Big Blue wannabe that's on the radar of value-oriented dividend lovers. Get the lowdown on the routing juggernaut in The Motley Fool's premium report. Click here now to get started.

Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2374035, ~/Articles/ArticleHandler.aspx, 9/26/2016 11:51:31 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 hours ago Sponsored by:
DOW 18,094.83 -166.62 -0.91%
S&P 500 2,146.10 -18.59 -0.86%
NASD 5,257.49 -48.26 -0.91%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 4:35 PM
^DJI $18094.83 Down -166.62 -0.91%
CSCO $31.07 Down -0.27 -0.86%
Cisco Systems CAPS Rating: ****
IBM $153.98 Down -1.00 -0.65%
IBM CAPS Rating: ****
ORCL $39.03 Down -0.20 -0.51%
Oracle CAPS Rating: ****