Now the World’s Most Valuable Company

40 years ago, on April 1, 1976, college dropout Steve Jobs and his friends Steve Wozniak and Ronald Wayne incorporated Apple Computer. At the time, few could have imagined that what started in Jobs’ parents’ garage would become one of the greatest success stories in corporate history.

While remarkably successful from the start – Apple went from zero to one and a half billion dollars in revenue within eight years – there were some ups and downs in the company’s early days. It wasn’t until Steve Jobs’ second stint as CEO that Apple became what it is today: the most valuable company in the world.

With the release of the iPhone in 2007, Apple’s revenue (and profit for that matter) started to skyrocket, reaching a record $234 billion in fiscal 2015.



As a computer industry veteran of 47 years, I remember that early Apple very well. Back in 1977, I was a product line manager at IBM in charge of the “white space” – i.e., new entry-level product development and opportunities.IBM Titanic June 1983 ACR

Sensing that we might be at the doorstep of a major industry transformation, I urged the senior IBM executives to invest in new “entry systems,” as we called them back then. (That was 3 years before the term “PC” was born). They refused. They thought companies like Apple, Atari, Osborn were “just” a “hobbyist” market.

“No money in it,” someone said. And also below the dignity of the industry leader like IBM.

So I left IBM in May 1978 to start my own business – Annex Computer which later morphed into Annex Research (http://djurdjevic.com/). I also bought an Apple II but I didn’t like it. I returned it to the store and got my money back.

Soon, IBM realized it was missing the boat. So it hurriedly invested in the development of a “Personal Computer” (PC), using a “borrowed” operating system (Microsoft DOS) and other hardware it could quickly assemble from various suppliers. The first PC that premiered in 1981 was that kind of a “hybrid.” Still, it became a success and gave the whole “entry systems” industry segment its name. Which has lasted to this today.

Meanwhile, Apple was plodding along, struggling as often as succeeding. Its business actually shrank in the late 1990s.

In 1996, I suggested to the relatively new CEO (Louis Gerstner), who was brought in to save the good old IBM, that the company might be missing the boat once again by not being in the low-end market. I showed him my forecast which predicted the consumer market to grow MUCH faster than the large enterprise business (19% vs. 1% per year – see the chart).


Like his predecessors in the late 1970s, Louis dismissed it as a “dumb idea” (see “Louis XIX of Armonk,” Aug 1996). And just like back then, IBM again missed the boat.

Today, consumer companies like Apple, Google and Microsoft are worth 3-4 times more than IBM. In fact, they are the three most valuable companies in the world, period. Bigger than Exxon or any other industrial dinosaurs. As for Big Blue, IBM is no longer even in the top 10.

So it goes… when companies stop reinventing themselves, they stagnate. And eventually perish. Like Kodak.

Happy April Fools’ Day!

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Screen Shot 2016-01-20 at 7.34.09 PMWhen I closed the doors on my business, Annex Research, on June 30, 2014, I did not think I would ever return to the analyst bullpen again. But one should never say never. So here I am, writing this short blurb about IBM only 18 months later.

But don’t worry. I am not unretiring, like Michael Jordan, who retired in 1993, 1998, and 2003 only to unretire in 1995 and 2001. 🙂 I love my life outside the bullpen and I intend to stay out. So this is a one-time shot. Sort of like pinch-hitting in late innings in just one game into which I stumbled accidentally.

I glanced this evening at the IBM 4Q earnings release as I was checking the precipitous stock market declines over the last several days. I have not looked closely at IBM in probably in a year. And I noticed that IBM tumbled even more than the Dow or S&P – down almost 5% just today (Jan 20). So I pulled up the IBM chart to see how bad things were.

I glanced at the IBM 4Q earnings release as I was checking the precipitous stock market declines over the last several days. I have not looked closely at IBM in probably in a year. And I noticed that IBM tumbled even more than the Dow or S&P – down almost 5% just today (Jan 20). So I pulled up the IBM chart to see how bad things were.


And they were pretty bad indeed. Since April 22, 2012, the IBM stock has declined 41%, from $207 to $122 per share.

Which should surprise no one on the Annex Research client list. Here’s what I said in part in that Apri 2012 report titled “BIG BLUE FEET OF CLAY:”

And we have a feeling this may be only only the start of a longer-term slide for this erstwhile bellwether stock of the Dow Jones Industrials’ index. Why the pessimism?

Three simple words: Lack of growth.

No amount of rhetoric and news-spinning by IBM’s CFO, Mark Loughridge, could reverse that fact.”

In August 2013, I updated that forecast and renewed our my call for a long-term decline of the erstwhile computer industry leader (“IBM: IN TROUBLED WATERS AGAIN“:

“Over 30 years ago, at a time when the world thought that Big Blue could walk on water (see TIME magazine cover, July 1983), we said IBM was sailing in troubled waters.  Nobody believed us, of course, least of all IBM executives.


And crash IBM nearly did nine years later. As the company teeter-tottered on the brink of oblivion, the Board ejected the IBM chairman and launched a rescue mission under a new “change artist” in early 1993.

We are in a similar situation now. When we said in Apr 2012 that IBM was stuck in its place with feet of clay while the marketplace around it was exploding, nobody believed us, either, least of all IBM executives.  Our media friends also remained largely mum about it. Witness the continued stock rise despite shrinking revenues (left chart).

Well, that illusion is now over.  Just like 30 years ago, the truth is slowly seeping out…”

Well, it took two-and-a-half more years for the stock market to accept this dose of reality.

Or did it? Will we see another resurrection attempt by the Big Blue faithful?

I doubt it. Even the most zealous IBM supporters must put their self-interests first. Unless they throw caution to the wind and decided they must hop aboard for one last ride on the Big Blue Titanic.

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After more than 1,100 years, “death by a thousand cuts” was outlawed as form of capital punishment in imperial China in 1905. Yet the gruesome ritual still seems to be practiced on Wall Street today. The latest victim? Big Blue. One of Wall Street’s favorites for more than six decades, IBM seems to be now suffering a slow and tortuous “death by a thousand cuts.” Ironically, China is one of the prominent recent bleeding gashes.

Take a look at the above chart.  Each time the market has reacted to disappointing FACTS emanating from Big Blue, Wall Street tried to prop up its darling with a new infusion of blood.  Over time, however, that was not enough. The victim’s health kept deteriorating as FACTS prevailed over wishful thinking.

No surprise there. We said nearly two years ago that IBM was in trouble (see Big Blue Feet of Clay – analysis of IBM 1Q12 business results and 5-year forecast, Apr 2012). At the time, the stock was at $207.  Today, it is hovering around $181 after another deep cut inflicted by the 4Q13 results, released  after the markets closed yesterday.

After three consecutive quarters of disappointing results, now everybody can see that IBM has feet of clay, as we put it back in Apr 2012. Only worse.  Not only the IBM hardware is now shriveling up rapidly, but its once buoyant “growth markets” – China, Russia, India, Brazil… – are all shrinking.  “Growth markets” declining? A new IBM oxymoron.

And so what’s IBM’s remedy?  Same old, same old: Stock buybacks.  Can the company keep on shrinking the number of outstanding shares to keep up with its shrinking business? Maybe so for a while. But ultimately, both will lead to extinction. And Wall Street is finally waking up to this reality. IBM has been the worst-performing top IT stock in the last 6 months and the last two years (see the charts below).

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IBM: “Rare Type of Organism That Eats Itself Alive” (Wall Street Journal)

“There is a rare type of organism that eats itself alive,” Dennis Berman, a Wall Street Journal columnist, noted in the Journal’s yesterday’s edition (1-21-14). “One of them is International Business Machines Corp.” [IBM -3.28%]

Berman goes on to explain something we have been critically writing about for the last 17 years  – that stock buybacks are a sign of corporate weakness, not strength.

“For the past 20 years, IBM has been an avid, methodical buyer of its own stock. In 1993, it had 2.3 billion shares outstanding,” the WSJ notes. “Today it has 1.1 billion, shrinking at more than 1% per quarter over the past few years. At that pace, there will be no more publicly traded IBM shares left by 2034.”

So IBM seems to be pursuing a road to extinction.

Well known Wall Street investor Jim Chanos is starting to worry about just this problem. He is coming around to the idea that buybacks are a sign of corporate weakness, not strength, the WSJ reports.

Which is what we have been saying for the last 17 years.  At the IBM 1997 Annual Meeting, this writer questioned the then IBM CEO about the wisdom of this strategy.

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“As I stand here before you, I am reminded of the question I asked of one of your predecessors, John Opel, at the Boston Annual Meeting in 1983,” this writer told Gerstner in Dallas, TX on Apr 29, 1997 .  ‘Why are you mortgaging IBM’s future?’

“I never thought I’d have to ask the same question again.  But here we are, and I do… So Lou Vincent Gerstner – ‘why are you mortgaging IBM’s future?'”

[see Stock Buybacks Questioned (IBM 1997 Annual Meeting, Apr 1997)“Corporate Cabbage Patch Dolls” (Nov 1998), Analysis of stock buyback bubble (May 23, 2007)].

And here we are for the third time in 30 years, having to ask the same question. Why is IBM mortgaging its future?

Because its management lacks both imagination and courage to do anything else except engage in “financial engineering.”

Back in the 1980s, such a lack of vision by John Akers and his predecessors (Opel, Cary) almost ran Big Blue into the ground. In the early 2000s, Gerstner left the company on a similarly perilous course.

It was Sam Palmisano focus on quality over quantity to manage to reverse the trend. For a while. Because even Palmisano lacked the courage for a more radical restructuring. Like breaking up Big Blue into smaller pieces, and pursuing aggressively NEW markets (beyond the corporate dinosaurs, IBM’s favorite customers). Both of them were recommendations this writer made in 1996, and again in 2006 (see Break Up IBM! (Mar. 20, 1996) and Analysis of IBM “state of the union” (Nov 10, 2006)).

No dice. “Big Blue Feet of Clay” remained stuck in place and in its old ways. And now, we are seeing the consequences. Double digit declines in hardware and once “emerging markets.”  Shrinkage even of its biggest services business. Dim outlook. A “death by a thousand cuts.” 

It is sad to see this once proud and mighty company come to this. But IBM is suffering a fate of its own making: Extinction. It’s just a matter of time. Which is the ultimate destiny of all empires. So the universe is unfolding as it should. 


By the way, lest I may be accused of writing more “I told you so” pieces, this will be my final commentary on IBM. Forty four years. Not a bad roller-coaster ride with Big Blue.  Thank you, IBM.  And farewell.

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