It’s Not Enough for IBM to Be Industry Giant
Is the stock market crazy or what? On Tuesday, IBM, the largest company in the computer industry and one of the world’s most powerful industrial organizations, reported sharply increased profits--up 50% in the fourth quarter of last year and up almost 10% for the full year on a 6% gain in sales to $54 billion.
It looked like a welcome recovery after two years when IBM earnings declined. But the stock market didn’t think so. Immediately after the earnings announcement, IBM’s stock fell more than $3 a share--and later continued to fall, finishing the day down $6 at $111.75 a share.
The problem, said news reports, was that stock market analysts expected IBM’s profits to be even higher. Also, they noticed that some of the increased profit resulted from bookkeeping adjustments--a lower tax rate in the fourth quarter and gains from currency exchange.
Quibble, quibble. The company had a good year that got stronger at the end. What does the stock market want?
The stock market--meaning the pension funds and other institutional investors who own more than half of IBM’s stock--want to be confident that this great company can return to being a pioneering leader of its industry.
And there are doubts about that because it is not the leader now in computer products that are increasingly important. The computer business has changed from one dominated by large, or mainframe, computers--where IBM ruled the roost--to one in which customers are clamoring for desktop machines--sometimes called microcomputers--that have as much computing power as the old mainframes. That, of course, is hardly a new story, and the champion seller of microcomputers, under the name Personal Computer, is IBM.
A Me-Too Product
But the giant company doesn’t lead in the development of new capabilities--new technology to use the fancier word--for the small computers. In an important sense, Apple Computer leads the technology with the Macintosh, the computer that is capable of drawing pictures and multicolor graphs and designs. The real appeal of the Macintosh, beyond its graphics capabilities, is the ease with which it can be used by anybody, an important factor as computers spread through the business organization and into uses at home.
The Macintosh is the reason Apple has been successful for the first time in selling to corporations. IBM has now come out with a product like the Macintosh. But that’s just it, the product is like the Mac, it’s a me-too.
The market worries also because even where the technology is available, IBM isn’t quicker than its competitors at bringing products to market. Thus Compaq Computer Corp. of Houston beat IBM to market with a desktop machine using a powerful processor from Intel Corp., even though IBM’s investment in Intel had made development of that very technology possible.
Similarly, the pace of change in applications programs for the small computers--the software that makes the hardware go--is controlled not by IBM but by one of its suppliers, Microsoft Corp. of Seattle, and other software companies.
The story is not simply one of smaller companies running faster than a giant, but that IBM may be having trouble understanding and keeping up with the rapidly changing marketplace.
So even though IBM sells far more computers in a year than Apple--far more in fact than all its small competitors combined--the stock market gives Apple shares a price that, proportionate to the profits of the company, is twice as high as IBM’s stock price. And it gives Microsoft, the software leader, a price three times as high.
What does that say? It says that because those smaller companies are developing the interesting new products and have a facility for anticipating customer needs, they will have faster earnings growth than IBM. Therefore, the market pays a premium for their shares.
On the other hand, if those companies were to stop anticipating trends and bringing out interesting new products, their stock prices would fall proportionately lower than that of IBM.
Why? Because IBM is solid. It alone has the weight in organization and business--and the ability in basic scientific research--to be the largest company in the world’s largest industry long term. So the market accords it a solid price--comparable to other big companies.
So, to answer the opening question, the market is not crazy. It pays one price for the tortoise, and another for the hare. More important to note, it pays up for real technological leadership, but it is not impressed by just a parade of numbers.
