IBM was worst-performing large-cap tech stock during Rometty’s tenure

IBM was worst-performing large-cap tech stock during Rometty’s tenure

Ginni Rometty, President and CEO of IBM, speaking at the @Work event in New York City, on April 2, 2019.

Cindy Ord | CNBC

During Virginia “Ginni” Rometty’s eight years at the helm of IBM, the technology sector enjoyed a historic rally, taking on outsized sway over the broader economy and stock market. Internet companies, software vendors and chipmakers all rallied as demand soared for computing power and applications.

Unfortunately for Rometty, IBM was the exception to the rule.

IBM’s stock dropped 24% under Rometty’s leadership, the only U.S. tech company currently valued at $100 billion or more to lose value in that period. Shares of the other 16 most valuable tech companies gained anywhere from 64% (Qualcomm) to 3,468% (Netflix).

On Thursday, IBM announced that Rometty is stepping down as CEO and will be replaced by Arvind Krishna, who has been leading the cloud and cognitive software business and spearheaded the $34 billion acquisition of Red Hat, which closed last year. In its press release, IBM said that Rometty, 62, “made bold changes to reposition IBM for the future, investing in high value segments of the IT market and optimizing the company’s portfolio.”

While the 109-year-old company has made big bets, including the Red Hat deal and investing heavily in cloud computing and artificial intelligence, IBM has either been firmly outside of the most high-growth tech businesses, like online ads and content, or has failed to capture significant market share in the areas where it does participate.

For example:

  • Amazon, Microsoft and Google have established themselves as the big three of cloud infrastructure.
  • Salesforce, Microsoft and Adobe own the most popular subscription software applications.
  • Chipmakers Nvidia, Broadcom, Texas Instruments, Intel and Qualcomm have, to varying degrees, benefited from the boom in computing. IBM sold off its chip business in 2014.
  • Accenture, one of IBM’s leading rivals in the IT services business, has almost quadrupled in value over eight years by focusing on helping clients transition to digital and cloud technologies.

Wedbush analyst Moshe Katri called the announcement a “welcome, long overdue leadership change” in a note to clients and said that IBM has to become more relevant in a world dominated by social, mobile analytics and cloud (SMAC).

“During the past few years, lackluster results and inconsistent financial performance reflected management’s inability to effectively transition the company’s largely legacy delivery/product portfolio into SMAC-based models,” wrote Katri, who has the equivalent of a hold rating on the stock. “Based on an impressive resume, the company’s new CEO may have a decent shot at getting tangible results from the company’s increased focus on digital.”

IBM’s stock rose 5.1% on Friday to $143.90, its best performance in a year, even as the broader market tanked on concern surrounding China’s fast-spreading coronavirus. Under Rometty, the stock fell from $183.88 when she took over to $136.77 at Thursday’s close.

Annual sales in the Rometty era declined from $107 billion in 2011 to a projected $77 billion for 2019. In 2015, Rometty referred to the divestiture the prior year of three businesses that had accounted for $7 billion in annual revenue as losing “empty calories” because they were low growth and low profit.

An IBM spokesperson declined to comment on the company’s stock price but pointed to the company’s “long term investments in technologies like quantum computing and blockchain as well as significant current investments in cloud and AI.”

Krishna, 57, takes over for Rometty after three decades at IBM, most recently as senior vice president in charge of some of the company’s most important businesses. Additionally, Jim Whitehurst, Red Hat’s CEO, will become president as of April 6. Red Hat was IBM’s biggest-ever acquisition, and it put a big open-source enterprise software business into IBM’s hybrid cloud unit.

Rometty told CNBC at the time of the Red Hat purchase that the deal should not be interpreted as part of a plan for her to transition out the CEO role.

“I’m still young and I’m not going anywhere,” she said.

— CNBC’s Jordan Novet contributed to this report

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