Holding My Nose and Taking a Quantum Leap of Faith on IBM
It’s looking ugly out there for the ‘Big Blue,’ but here’s why I’m not ready to bail just yet.
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My regular readers know that I have been long the shares of International Business Machines (IBM). IBM has and is my investment in the quantum computing space. My thesis as many of my readers know, after I exited most of the other quantum computing names, is that unlike those much smaller companies, firms like IBM and Alphabet (GOOGL) had the positive cash flows to fund expansion into that still costly business and were set up to maybe acquire the more promising of those companies. While Alphabet drives greater operating cash flow, IBM converts a far greater portion of its operating cash flow into free cash flow. I went with IBM. I was right in that call. Until this morning. This is that story.
The News … Ouch
The share price of IBM dropped precipitously ahead of the opening bell in New York. The company, scheduled to release its second-quarter financial results next week, released preliminary results this morning that fell short of expectations. “Big Blue” (Not the New York Football Giants) posted an adjusted earnings per share of $2.93 on revenue of $17.2 billion. Wall Street consensus view had been for adjusted earnings of $3.02 per share and revenue of about $17.86 billion.
At last glance, I see the stock down more than 21% from Monday night’s closing price. Yes, I have added a few shares to my long position. Do I know that I am right? It would be deceitful to publicly express confidence in IBM this morning.
The CEO … Finally
CEO Arvind Krishna wrote a letter to shareholders and tried to explain. “In the last few weeks of June, we saw clients shift their quarterly capital spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases. While we anticipated some supply chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization.”
Krishna went on: “These conditions require our teams to execute perfectly, and this quarter we faltered. We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected, driving the majority of our shortfall. These are not excuses, but they are realities. Our job is to help our clients through uncertainty, to find paths forward to grow their businesses no matter what is happening in the external environment.”
I Like That
I don’t like taking it on the chin in IBM, but at least the rest of my portfolio is having a nice morning thanks to an ice-cold June consumer price index report. That takes some of the pressure off. I do like (very much) a CEO who stands up and says that he did not do his job as well as he should have, and neither did his team. That’s an easy leader to root for. Not that rooting wins ball games. Remember, I have been a New York Jets fan since the Namath days.
On Quantum Computing
This is why I am a buyer of IBM and not heading for the exits with everyone else. Down toward the bottom of Krishna’s letter, we see this: “Finally, quantum computing is no longer decades away, it is upon us, and we are investing aggressively. Recently, with the U.S. Department of Commerce, we announced a letter of intent to build Anderon, the world’s first pure-play quantum wafer foundry supported by $1 billion in CHIPS incentives provided by the DoC and a $1 billion cash contribution by IBM. Shortly after that, we disclosed plans to invest more than $10 billion in quantum over the next five years, spanning R&D, capex, manufacturing scaling, M&A and ecosystem expansion. We remain on track to deliver the first large-scale fault-tolerant quantum computer by 2029.”
Maybe that’s too far out. I do think that under this CEO’s leadership, IBM will regain its place as a prominent tech name in this country and ultimately, globally. I believe that quantum computing will be that driver. I will use occasional weakness in the share price to establish a large, long position in this name by the time this matters. I am an investor in IBM, not a trader. At least that’s the plan. Not the first time, by the way, that I’ve been punched in the mouth. With any blessings from my Creator, won’t be the last.
The Chart
Readers will see in this daily chart, the cup with handle pattern that had produced the mid-June rally that lasted into Monday. That rally is now dead as is the bullish reversal that the cup with handle supposedly would have set up. Relative Strength is now close to technically oversold territory and the daily moving average convergence divergence just went suddenly bearish. C’est la vie.
I have added to my stake this morning. My eyes are on that $212 low from May 13. That is where I am willing to add down to. If that spot fails to hold, we’re going to have issues. That was a post-November 2024 low and then I would have to go into risk management mode and trade around my core position.
There is no surrender here. That said, IBM was my fifth largest position as of last night. It is now, even with this morning’s additions, number seven, having been passed by both Advanced Micro Devices (AMD) and CrowdStrike Holdings (CRWD). I will try to leave IBM in my “Top 10” but we’ll see.
At the time of publication, Guilfoyle was long IBM, AMD, CRWD equity.
