IBM stock is down for the year.
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With the year almost over, we’re taking a look at all 30 stocks in the Dow Jones Industrial Average, starting with the worst performers— Boeing and Walgreens Boots Alliance —and working our way up to the highest-flying stock in the benchmark— Apple. The ranking may shift before the close of 2020 trading, but the stories behind the stocks shouldn’t.
The tumultuous events of 2020 only underlined the need to change for legacy technology companies like IBM. The pandemic accelerated the adoption of cloud-based computing, leaving companies with more traditional products and services racing to adapt.
In IBM’s (ticker: IBM) case, the transformation began in July 2019, when it completed the $34 billion debt-financed acquisition of open-source software company Red Hat—the largest deal in the history of the software industry. The second big step was its January 2020 announcement that the chief architect of the Red Hat deal, long-time IBM (IBM) exec Arvind Krishna, was succeeding Ginni Rometty as CEO. Just a few weeks ago, Krishna added the title of chairman, as Rometty steps away from her formal roles at the company.
The other crucial moment came in October, when IBM announced that it will split into two companies. It is carving out its $19 billion managed-infrastructure services business into an independent company, zeroing in the rest of IBM on hybrid cloud software and services, with Red Hat at the heart. The “hybrid cloud” is a combination of “private clouds” that individual companies run themselves and “public clouds” provided by tech companies.
The transaction is expected to close by the end of 2021. And while the business that will be spun off only provides about a quarter of IBM’s total revenue, IBM has not yet announced a leadership team, board members or even a name for the new business.
IBM stock initially spiked on the news, but the shares have been roughly flat since making that announcement. There’s good reason for that. It isn’t easy to evaluate the two businesses at this point, given how little information IBM has provided so far about the spinoff. Investors often see breakups of this variety as a way of creating value—but in this case, Wall Street seems to think that this is more of a shuffling of deck chairs than a real improvement in the growth prospects of either company.
The issue was apparent in IBM’s latest quarterly financial results. Overall revenues were down 2.6% from a year ago. And while cloud-related business was up 19%, its $6 billion in cloud revenue was only about a third of the total.
Looking into 2021, investors await more detail on the planned split—and any signs that either or both parts of the business can return to even modest growth.
IBM shares are down roughly 7% in 2020, lagging far behind not just the tech sector, but also the broader market. The S&P 500 is up 15% for the year.
Write to Eric J. Savitz at [email protected]
