IBM (IBM 1.25%) has made a lot of investors both happy and wealthy in the long run. But Big Blue has run into trouble in the last couple of years, and has been among the worst-performing stocks of the 30 Dow Jones Industrial Average components for the past 52 weeks.
Investors have mixed feelings about this stock, to say the least. What's up with this love/hate relationship, and where is IBM going next?
The bad news
Current CEO Ginni Rometty took the reins from predecessor Sam Palmisano at the start of 2012. Unfortunately, some of IBM's most important business metrics peaked at that very moment, leaving investors worried that her revamped business strategy might not be on the right track:
IBM Revenue (TTM), data by YCharts
Rometty's plan includes moving away from low-margin hardware sales and deeper into the more profitable software and services areas. The company has unloaded many hardware assets by selling them to interested sector rivals. The latest example is IBM's server lines based on Intel chips, which are going to Chinese giant Lenovo for $2.3 billion.
It's a drastic change of direction, and it's hurting IBM's revenue. The new strategy is both very timely and unfortunate, due to the big changes currently unfolding in the enterprise computing market.
It's unfortunate, because the speed bumps caused by market shifts are amplified by the simultaneous revenue-bruising business changes. On the other hand, the new market treats hardware as a commodity but places a premium on high-quality software -- so moving in that direction is exactly the right idea.
If anything, IBM might have been better off performing this transition a couple of years earlier. But I suppose Sam Palmisano's crystal ball must have been in the shop for a tune-up at the time.
IBM CEO Ginni Rometty. Image source: IBM.
The good news
There's plenty to love about IBM's core business. Big Blue's gross margin is in fantastic shape and only getting better. The company remains committed to a massive share buyback program, which has reduced the number of shares outstanding by a staggering 39% over the past decade. And again, I'm convinced that IBM is actually changing in all the right ways. It just got started a little late, and hit some unexpected snags along the way.
I'll admit that there is plenty of legit risk built into IBM's low share price. Rometty hasn't been the smoothest executive on the block, and she's under assault from a plethora of challenging market conditions beyond her control.
Then again, the same is true for all of IBM's serious rivals. Cisco Systems (CSCO 0.46%) may be stealing a march on IBM's server sales, but Big Blue is leaving that area up for grabs to focus on more profitable operations. Lacking a serious software division, it's unclear exactly what Cisco is gaining there.
The Hewlett-Packard (HPQ 0.38%) story shouldn't disturb IBM investors' sleep schedules, either. Facing the same market transitions that forced IBM deeper into software, HP is splitting up into two separate but tightly related businesses but remains mostly a hardware play on both sides.
Both Cisco and HP have been trying to emulate IBM's business model for years, but never quite got that far. Now that they have a shot at getting there, IBM is moving out to find greener pastures.
When all is said and done, a couple of years down the line, I see IBM better positioned than either one of these would-be usurpers as the IT industry stabilizes once again. And I say that with the greatest respect, because few rivals can match Cisco and HP in the modern IT market. IBM is just an obvious exception to that rule.
Final words
In short, I think that IBM's bargain-basement share price is a mouth-watering buying opportunity. Master investor Warren Buffett agrees and keeps buying additional IBM shares. Fellow Fool Andres Cardenal also sees more of a buying window than a shock of red flags around IBM today.
If I could only stop writing about IBM so often, I might build a position someday soon. Until then, our Foolish disclosure policy is staying my hand. Next time you hear from me, I just might be the proud owner of some cheap IBM shares.
