With only a few more trading days left in 2013, it appears International Business Machines (IBM 0.78%) will end 2013 as the worst performing Dow Jones Industrial Average (^DJI 1.05%) component of the year.
Shares are currently down more than 4% year to date, while the Dow itself is up more than 24% since the start of the year. The next worst Dow stock is Caterpillar, which is just barely above the break-even mark for 2013. On the flip side, the best performing Dow component is Boeing, which is higher by more than 81% and absolutely puts IBM's year-to-date performance to shame.
So, why did IBM not only fail to pace the Dow but actually lose value in 2013? Simple: The company failed to innovate and adapt to changing market conditions over the past few years. And 2013 was the first time investors really began to notice the change in data storage and server sales as cloud computing really took over.
Cloud computing, or the ability to store and retrieve data remotely, made leaps and bounds this past year, and more and more companies began to adopt the technology. This was very bad news for IBM and other mainframe-computer manufacturers in 2013 and will likely continue to plague the industry for some time.
In the past, IBM would sell each individual company a mainframe computer and data-storage solution. But now those thousands of tiny companies have realized it's cheaper to let someone like IBM, Amazon, Apple, Microsoft, or a number of other places build data farms and rent them space to store data. Additionally, the difference for a small company in paying a monthly fee or buying all new equipment every few years is massive. Plus, with the cloud the service provider is the one taking the risk associated with the equipment, the liability, maintenance, upkeep, and closet space.
IBM does offer some solutions for cloud computing, which carries a much lower price that servers -- and even more importantly, a lower profit margin. Furthermore, while the blue-chip technology company still has other means of revenue besides its server business, that unit was a big revenue driver -- and investors are already predicting poor results from this segment moving into the future, thus the share price falling into the red for the year.
Looking at the bigger picture for IBM, the company has experienced tough times in the past and gone through a number of different technological changes within the industry and it has always pulled through. In the future, IBM needs to find a revenue source that will replace the server business and it needs to do it in a hurry, before sales tumble too far.
Current investors need to keep an eye on how the different units' revenues fluctuate in the coming quarters and diligently watch to see if IBM is going to find a suitable revenue replacement. Until management solves this problem and revenue continues to decline, shares will likely follow suit. So be patient, but be ready to pull the trigger if things get too ugly.
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