IBM Struggles To Keep Up

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What's going on?

After reporting lower quarterly revenue and profit versus last year, IBM saw its stock slide by almost 5% on Wednesday!

What does this mean?

Over the last few years, IBM has begun to pivot away from its traditional products like computers and operating systems (where profits are low across the sector) towards newer sectors like cloud computing and artificial intelligence. IBM reported that revenue from these new initiatives bumped up by 12% over the past 12 months, which is a good sign for that turnaround plan. However, it still wasnt enough growth to make up for declining revenues in the other parts of the company (like its legacy software business, which saw sales decline 22% versus last year).

Why should I care?

For the stock: IBM has previously said improving profitability is more important than declining revenue but investors appear unimpressed.

IBM has been working to improve how much profit it earns (i.e. increase its margins) by shifting into newer businesses such as artificial intelligence (e.g. Watson) where it has, arguably, built a first-mover advantage. In theory, as an early entrant into the market, IBM can earn high margins before too many competitors enter the market and potentially push prices down. However, Wednesdays results suggest that IBM still is not improving its profitability quickly enough to keep investors happy.


The bigger picture: Innovative competitors make it tough to stay on top in tech.

It wasnt long ago that IBM was the worlds second most valuable tech company, but its been eclipsed by the likes of Amazon, Alphabet and Facebook. The nature of tech is inherently disruptive far more so than relatively static industries like airlines or soft drinks. With each new competing innovation in the market, IBM has either had to innovate even more or take a hit as lower revenues from its existing products dragged down its overall revenues and thats a challenge todays tech behemoths are already facing.

Originally posted as part of the Finimize daily email.

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