What's Wrong With IBM Stock Today?

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Government contracts can be game changers even for the biggest and strongest companies on the market. Today, IBM (NYSE: IBM  ) is suffering a black eye and a fairly significant share-price plunge as the CIA takes its $600 million cloud-computing contract elsewhere.

IBM has been fighting a public bidding war with Amazon.com (NASDAQ: AMZN  ) over this contract since the summer. The back-and-forth between traditional data-services powerhouse IBM and online retailer Amazon saw Amazon winning the bid, IBM asking for a rebidding process, and Amazon suing to stop the rebid.

But it's all over. IBM has withdrawn its latest attempts to derail Amazon's big contract win, and the CIA will get private cloud services from the increasingly data-intensive e-tailer for the next 10 years.

Big Blue's sales topped $100 billion last year, while Amazon's revenue soared past $60 billion. At $60 million a year, the contract is a rounding error for both companies. So, what's the big deal?

Research firm IDG Government Insights says the Department of Defense, of which the CIA is but a small cog, spends about $35 billion a year on information technology. Expand your scope beyond the military and intelligence communities, and you'll find the Federal government shoveling $80 billion a year into IT projects. That's a big deal.

IBM already plays a huge part in this enormous market, but Amazon is a newcomer. Amazon may be a trailblazer and a leader in cloud-computing services, but the company hasn't spent much effort on government opportunities.

Until now.

IBM shareholders appear to take this potential sea change far more seriously than Amazon's owners do. Or perhaps Amazon investors already priced this outcome into the stock while IBM's owners didn't. Amazon shares have traded sideways today, while IBM is down.

IBM's 0.7% drop has shaved eight points off the Dow Jones Industrial Average (DJINDICES: ^DJI  ) , continuing a somber two-quarter trend. IBM shares have plunged 15% since the middle of April, single-handedly taking away 200 Dow points. You can't blame Amazon for all of that, given that IBM is transforming its business model under new management and these things can be painful.

But do note that Amazon shares surged 33% over the same period. The company doesn't break out its data services from the core retail operations in quarterly reports, but it's clear that Amazon is onto something good with this newfangled business line. We might be witnessing a changing of the guard in IT management services -- another long and perhaps painful process, but certainly one worth keeping an eye on.

But for now, IT is just a sideshow for Amazon
Amazon is taking a good look at new opportunities in IT services, but the company is still firmly a retailer at heart. And a fantastically successful one, at that. To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.


Read/Post Comments (0) | Recommend This Article (2)

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.

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: 2706017, ~/Articles/ArticleHandler.aspx, 9/16/2014 5:32:49 AM

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 8 hours ago Sponsored by:
DOW 17,031.14 43.63 0.26%
S&P 500 1,984.13 -1.41 -0.07%
NASD 4,518.90 -48.70 -1.07%

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

9/15/2014 4:29 PM
^DJI $17031.14 Up +43.63 +0.26%
DOW JONES INDUSTRI… CAPS Rating: No stars
AMZN $323.89 Down -7.30 -2.20%
Amazon.com CAPS Rating: ***
IBM $191.81 Up +0.53 +0.28%
International Busi… CAPS Rating: ****

Advertisement