Tech conglomerate International Business Machines (IBM 0.16%), or Big Blue, is one of technology's oldest companies. The business was founded in the early 1900s and has been there through the invention of the computer to the hardware and software solutions it sells today.
But maintaining success in the technology space is about innovation, and it's unclear whether IBM has successfully evolved in recent years. Here are three reasons to think twice before buying the stock.
1. Lackluster growth
IBM faced what's sometimes called the "innovator's dilemma." It's when a company must choose between an already successful incumbent technology or embrace a potentially disruptive one. It can be challenging because customers sometimes demand better iterations of existing solutions, refusing to embrace something new until the value proposition is obvious.
IBM's golden age came in the 80s, 90s, and early 2000s when it was the leader in selling on-premise mainframes and computing systems to enterprises worldwide. But cloud computing, which takes computing off-site to centralized providers like Amazon's Amazon Web Services, began gaining momentum by 2010. Enterprises started seeing the cost and convenience of operating in the cloud, and demand declined for on-premise hardware computing systems.
You can see this play out in IBM's revenue growth over the years; it's not coincidental that revenue peaked shortly after 2010 when cloud platforms began growing. IBM eventually spun off its managed infrastructure business as Kyndryl Holdings.
IBM Revenue (TTM) data by YCharts
Over the past several years, IBM has retooled its business, incorporating the cloud to create hybrid-cloud offerings, which use cloud and infrastructure together. The company has returned to growth, expanding revenue by 9% year over year in the second quarter of 2022.
But it's not clear that IBM's efforts are enough; management is calling for mid-single-digit revenue growth this year, and analysts are looking for around the same in 2023.
2. IBM tapped out its balance sheet
Such modest top-line growth might not be enough given how IBM has managed its financials over the years. Management spent billions over the years on dividends and share repurchases, slowly increasing the leverage on the balance sheet. Dividends and repurchases are good for shareholders in the short term, but a business still needs growth to thrive over time.
IBM Financial Debt to EBITDA (TTM) data by YCharts
The company acquired software company Red Hat in 2019 for $34 billion to help its retooling efforts, but now its balance sheet sits with leverage at almost five times EBITDA. That's a high figure that doesn't leave many options for IBM moving forward.
Management has stopped repurchasing shares, but it might be too late. IBM probably won't be able to make any big moves with its current debt load, which makes its modest revenue growth stand out for the wrong reasons.
3. Losing the cloud battle
Lastly, IBM is seemingly losing the fight for cloud market share. Statista estimates the cloud infrastructure market at roughly $203 billion as of June 2022, and IBM's market share is just 4% of that total. It's miles behind the three industry leaders, including Amazon at 34%, Microsoft Azure at 21%, and Alphabet's Google Cloud at 10%.
It's hard to see why enterprises would pick a smaller provider over AWS or another leader unless they already use IBM's existing ecosystem. In other words, will new and emerging companies choose IBM over AWS or Azure in the coming years? It's hard to see the case for it.
IBM's stock has been on a decade-long slide, falling 31% over the past 10 years. Unfortunately, it looks like the decline stems from a fundamental deterioration of IBM's business, which is no longer the technology leader it was 20 years ago. Considering its modest revenue growth, low cloud market share, and bloated balance sheet, investors should look elsewhere for long-term opportunities.
