3 reasons to reconsider buying this popular technology stock

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A tech conglomerate International business machines (IBM 0.44%)Or Big Blue is one of the oldest technology companies. The business was founded in It dates back to the early 1900s, when the computer evolved into the hardware and software solutions it sells today.

But sustaining success in the technology space is all about innovation, and it’s unclear whether IBM has successfully evolved in recent years. Here are three factors to consider before buying the stock.

1. Lack of growth

IBM faced what is sometimes called the “innovator’s dilemma”. It’s when a company has to choose between a technology that’s already in place successfully or embrace a potentially disruptive one. It can be challenging because customers sometimes ask for better solutions, refusing to accept something new until the value proposition is clear.

IBM’s golden age came during the 80s, 90s and early 2000s. of A leader in selling mainframes and computing systems to enterprises worldwide. But cloud computing, which takes computing off-site to centralized providers AmazonAmazon Web Services began its revival in 2010. Enterprises are beginning to see the cost and convenience of operating in the cloud, and the need for front-end hardware computing systems has decreased.

You can see this play out in IBM’s revenue growth over the years. It is no coincidence that revenues peaked after 2010 when cloud platforms began to grow. IBM finally won the managed infrastructure business Kyndryl Holdings.

IBM earnings (TTM) chart

IBM Revenue (TTM) data by YCharts

Over the past several years, IBM has reshaped its business, incorporating the cloud to create hybrid-cloud offerings that share cloud and infrastructure. The company returned to growth, expanding revenue by 9% in the second quarter of 2022.

But it is not clear that IBM’s efforts are enough; Management is calling for mid-single-digit revenue growth this year, and analysts expect the same in 2023.

2. IBM touched the balance sheet

Given how IBM has managed its finances over the years, such modest top-line growth may not be enough. Management has gradually increased leverage on its balance sheet by spending billions on dividends and buybacks over the years. Dividends and buybacks are good for shareholders in the short term, but a business needs growth to thrive over time.

IBM's debt to EBITDA (TTM) chart

IBM Financial Debt to EBITDA (TTM) data by YCharts

To aid the company’s recovery efforts, In 2019, Red Hat acquired the software company for $34 billion, but its balance sheet now sits at five times EBITDA. That’s a high number that doesn’t leave many options for IBM moving forward.

Management has stopped buying back shares, but it may be too late. IBM probably won’t be able to make any major moves with its current debt burden, which could make its modest earnings growth stand out for the wrong reasons.

3. Losing the cloud war

Ultimately, IBM is losing its battle for cloud market share. In the year Statista estimates the cloud infrastructure market at around $203 billion by June 2022, and IBM’s market share is only 4% of the total. It’s miles behind three industry leaders, including Amazon at 34%. Microsoft Azure by 21%, and AlphabetGoogle Cloud at 10%

Unless enterprises already use IBM’s existing ecosystem, it’s hard to see why they’d choose a smaller vendor over AWS or another leader. In other words, will new and emerging companies choose IBM over AWS or Azure in the coming years? It’s hard to see the case for that.

IBM stock has been on a decade-long slide, falling 31% over the past 10 years. Unfortunately, the decline appears to stem from a fundamental failure of IBM’s business, which was not the technology leader it was 20 years ago. Given its modest revenue growth, low cloud market share and skewed balance sheet, investors should look elsewhere for long-term opportunities.

John McKee, CEO of Whole Foods Market, a subsidiary of Amazon, is a member of the Motley Fool’s board of directors. Alphabet CEO Susan Frey is a member of The Motley Fool’s board of directors. Justin Pope has no position in the mentioned stocks. The Motley Fool has positions and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Microsoft. The Motley Fool has a disclosure policy.



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