IBM Investment Thesis

Published on 04/28/21 | Saurav Sen | 5,270 Words

The BuyGist:

  • This thesis was originally posted on April 13th, 2018. 
  • We go through the company's competitive advantage, durability of competitive advantage, and its management quality. 
  • Since we wrote this, a lot has changed. We regularly revisit our thesis to see what we got right and what we got wrong.

Thesis Summary

The combination of Watson, Industry-Specific Data, Industry expertise, and Hardware built for heavy-duty AI, makes for a strong castle. The virtuous feedback loop amongst these businesses could widen the Moat against competition.

Competitive Advantage: The Castle

  • Core Competency? Data Analysis Solutions through AI, Cloud and Industry Expertise.
  • Better or Cheaper Products? Potentially better, by infusing AI with better industry-specific data.
  • Historical Profitability? Revenues down 3% since 2015. EBITDA down 20% over same timeframe.

Durability of Competitive Advantage: The Moat

  • Competition? Heavy. Giants like Google, Microsoft and Amazon investing heavily in AI.
  • Protection? End-to-End services model: AI, Data, Cloud, Consulting, Hardware offered seamlessly.
  • Resiliency of Cash Flows? Have been volatile. But new business is more long-cycle.

Management Quality

  • Strategy & Action? High marks for aligning company around AI. Capital Allocation questionable.
  • Alignment of Incentives? Above Average. Variable comp. is a mix of Cash Flow metrics and stock.
  • Financial Productivity? High ROE business – but inflated by Share Buybacks.
  • Sustainable Free Cash Flow? About $10 billion a year. Translates to valuation of $218/share.

In the sections below, we expand upon each of these points. This was originally posted in April 2018.

Please Log In or Subscribe to read the full article. Thank you.

We use cookies on this site to ensure the best service possible.