IBM Stock Has Dropped 20%. Is It A Play For Value Investors?

IBM (NYSE: IBM) stock used to be the darling of Wall Street. For most of our grandparents and even some of our parents, IBM was a staple stock in their portfolio. You could always count on Big Blue to grow revenues, grow its stock price, and pay out a healthy dividend.

But times have changed. Thanks to technology, this tech darling of Wall Street is now a dog. Over the past 5 years, the stock price has dropped by over 20%. Unless things change, IBM is going the way of other great portfolio staples.

So let’s look at what the issues are for Big Blue and whether or not the company can correct them. And if they can, does this make IBM stock a play for value investors?

The History Of IBM

IBM began in 1911 as Computing-Tabulating-Recording Company (CTR) and was then renamed International Business Machines in 1924. The company currently manufactures and markets computer hardware and software as well as offering hosting and consulting services in areas ranging from mainframe computers to nanotechnology.

Surprisingly, IBM has a made a handful of important inventions, including:

  • the personal computer
  • floppy disks
  • hard disk drives
  • relational databases
  • SQL programming language
  • dynamic random-access memory (DRAM)
  • automated teller machines (ATM)
  • magnetic stripe card
  • UPC barcodes

In recent years, Big Blue has been shuttering its legacy services like personal computers to more modern business offerings like corporate IT services.

Issues At IBM

Earlier I mentioned that the stock price of IBM has fallen by more than 20% over the last 5 years. What has been going on, you ask? Well for starters, during this period revenues that IBM earns has consistently fallen.

And the most recent earnings report is no exception. While the company beat earnings per share estimates of $2.97 by $0.23, it missed its revenue target of $19.29 billion by $160 million. This was a drop of 5% compared to the prior year.

The issues at IBM are that old technologies just aren’t as valuable any longer. Add that in with smaller companies who specialize in certain niches who are taking away customers from Big Blue.

For example, IBM packages the services it offers into a large bundle. But many of their customers may only have a need for one or two services. So instead of buying things they don’t need, they head to smaller firms that specialize in those one or two services.

IBM is trying to work on this issue by offering new services, but it will take time for these changes to have a meaningful impact on the bottom line.

Is IBM A Smart Value Play?

Whenever a stock drops by 20% or more, value investors ears perk up and they start to pay attention. So is IBM a stock to buy at this time?

If you just look at earnings and the stock price, the company looks very cheap. Add in the 4% dividend yield and you probably have some value investors jumping on board.

But I wouldn’t get too excited. I don’t see much upside for IBM in the coming years. This means you are just going to collect a 4% dividend.

There are no signs that the company is looking to make any major changes to right the ship. Instead they seem happy to just drift along.

And the company’s largest shareholder, Warren Buffett, has decided the stock isn’t worth holding at this point either.

Final Thoughts

In the end, I would steer clear of IBM. Until they signal they are ready to start taking real action to correct the issues at hand, I don’t see the stock doing much of anything, other than treading water or sinking further.

Of course, they could surprise us and start acquiring some of these smaller players to more quickly correct things. In this case, now might be a good time to jump in. But there are no signs pointing at them looking in this direction.

This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.

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