IBM Throws A Hail Mary

IBM reminds me of that football team that’s been .500 for years and the last time they were in the playoffs was ten years ago. The 100-plus-year-old computer-services giant has been trying to reinvent itself for years to say young and relevant, but to no avail…until the other day. Until the other day revenue has declined by approximately 25% since 2012 and the stock price has been ranging for the last four years, despite a raging bull market.

The other day, Sunday to be exact, IBM decided to throw a Hail Mary pass aka a Doug Flutie.

IBM purchased Red Hat, Inc. for $34 billion purchase of Red Hat Inc.

The price tag IBM paid made the purchase the world’s second-largest technology deal ever in an effort to compete right away in the cloud computing service business against the two leaders, Amazon and Microsoft who control about 50% of the market collectively.

IBM CEO Ginni Rometty and Red Hat CEO James Whitehurst both believe the market will be worth $1 trillion dollars in the future and it's still the 1st quarter of the football game because many companies still keep the bulk of their computing off of the cloud.

However, many on Wall Street think the purchase is risky with the belief that IBM was further behind with regards to their cloud service operation.

NOTE: in 2017, Buffett sold most of his stake in IBM to buy Apple...and we know how that has paid off thus far.

First of all they had to pay a 60% mark-up to the close of Red Hats, stock price because I’m sure there were other companies such as Microsoft and Oracle sniffing around. Also, although is only the 1st quarter, Amazon and Microsoft have a huge lead, already throwing for 500 yards and rushing for another 200 yards. However, Ginni isn’t scared as IBM already has a $19 billion cloud operation.

Ginni also thinks IBM/Red Hat now have the competitive advantage and is the best chance to gain market share. Ginni and James believes companies want more flexibility in the form of hybrid clouds that allows them to move workloads around to different clouds, private, public, local, in other words an open source architype.

So, if I had to view the monthly chart as a football field and because IBM has been range bound for four years, if price moves above the monthly supply at and stays above and eventually moves higher, IBM wins. However, if price moves below the monthly demand and continues to drift lower, IBM loses.

This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.

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Published on

by rollandthomas

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