When a Storied Company Stumbles
Picture this: You’ve got bad news to break to someone you care about.
You could postpone the deed until it feels like “the time is right”... or you could rip off the Band-Aid and get it over with right away.
This week a storied American company had bad news to break to its shareholders. It opted to rip off the Band-Aid. Shareholders did not take it well. At all.
Maybe you’ve already figured out we’re talking about IBM — mentioned here briefly on Tuesday. Big Blue opted to disclose bad news a few days before it was scheduled to report earnings. Shares took a record one-day tumble of more than 25%.
IBM is a long-term hold in the portfolio of Altucher’s Investment Network — and I do mean long-term, since late 2017.
IBM: One Bad Quarter. One Big Opportunity.
In 2007, I was running a hedge fund and writing a column for the Financial Times.
I wrote an article about International Business Machines Corporation (IBM).
My argument was simple: Wall Street had the company completely wrong.
They saw a fading mainframe business with nowhere left to go.
What I saw was a company that was consistently profitable, reinventing itself, and almost entirely ignored by the people who should have been paying attention.
Nineteen years later, that mainframe business Wall Street wanted to bury is still at the center of IBM's story.
This week, IBM announced a preview of next week's earnings.
The mainframe unit came in short, and the stock dropped 27%, one of the worst single-day drops the company has seen in decades.
I'm not going to pretend the drop doesn't sting.
But I've seen how this ends.
The last time Wall Street was this wrong about IBM, the stock outperformed the S&P 500 by 11.5x within five years.
And from where I'm sitting, they're making the exact same mistake again.
Why Nobody Turns the Mainframe Off
Most people have never heard the word mainframe, so here's what we're talking about.
Mainframes are used for processing credit card transactions, flight bookings, and insurance claims.
Unlike other servers, they can handle tens of thousands of transactions per second, 24 hours a day, every day of the year without missing a beat.
The global financial system runs on them: forty-five of the fifty largest banks in the world depend on these machines, and they've been spending on them reliably for decades.
Then AI changed the math.
That routine upgrade money got redirected toward AI hardware instead – chips, accelerators, and servers are in short supply globally, with companies front-loading purchases to get ahead of price increases.
Which means that mainframe spending is temporarily on hold.
Wall Street is worried this is a signal that AI is going to replace the mainframe.
That’s the part they’ve got wrong.
Two thirds of Fortune 500 rely on them, and for good reason.
Many of them have been running mainframes for decades – and in a lot of cases, the engineers who wrote the original software are long gone.
Nobody inside those companies knows exactly what would happen if they turned the mainframe off, and nobody wants to be the one to find out. You don't replace a system that has never failed, not when failure means every transaction stops.
The bear case on mainframes is wrong. But here’s the thing – the real bull case on IBM has almost nothing to do with mainframes.
The Problem Every Company Has Right Now
Every company buying AI hardware runs into the same problem almost immediately: they have no idea how to use it. And that’s exactly IBM’s business.
That's IBM's business.
Before any company can run AI, it needs its data organized.
IBM works with Fortune 500 companies, like Pepsi, Ford, and Verizon, on exactly that problem.
Decades of disorganized data. Spreadsheets in conflicting formats. Paper records. Handwritten notes.
IBM works with Fortune 500 companies like Pepsi, Ford, and Verizon to structure all of it so AI models can actually read it.
Here's why that matters, and why it's not a job that goes to a startup. When a Fortune 500 executive picks a vendor and it fails, that failure belongs to them personally.
IBM has been the safe answer to that problem for decades.
No startup can offer that.
IBM's consulting division is already getting paid for generative AI work.
But enterprise customers are still in the early stages of deployment, and they move deliberately.
The biggest numbers are still ahead of us. The only real question is timing – and I've been here before on that too.
The Same Bet, Nineteen Years Later
The column I wrote in 2007 wasn't a prediction that IBM would never miss a quarter.
It was an argument that Wall Street's story about IBM was structurally wrong.
That story is wrong again today.
The miss was concentrated in one unit, while total revenue grew and infrastructure sales hit records.
A 27% drop on that picture isn't a verdict on the company – it's a reaction to a single number.
I know it hurts if you own the stock. It hurts for me too.
But the thesis hasn't changed: IBM is consistently profitable, reinventing itself again, and positioned at the center of the biggest enterprise technology shift in a generation.
I made this same argument in 2007. Within five years, IBM had outperformed the S&P 500 by 11.5x. I was early then, and I might be early now – but those are odds I'll take every time.
Dave’s final word: Two stories are dueling for Mr. Market’s attention going into the weekend — trouble in tech, and trouble in the Persian Gulf.
The shakeout in chip stocks still isn’t over. The Philadelphia Semiconductor Index (SOX) is down another 2.2% as we write. It now meets the conventional definition of a bear market — down 20% from its peak less than a month ago. Nvidia, meanwhile, just lost its crown as the world’s most valuable company. (Apple’s back on top.)
That weakness is spilling over into the Nasdaq — down 1.3%. And the S&P 500 — down two-thirds of a percent.
Precious metals are licking their wounds from yesterday — gold just under $4,000 and silver at $55.53. And crypto is pulling back with Bitcoin just over $63,000 and Ethereum at $1,818.
As for the Gulf… the war is reaching a new and dangerous stage — pushing U.S. crude futures up another 3% to a one-month high of $81.44.
U.S. airstrikes are now targeting bridges in Iran. There are credible reports that Tehran has retaliated by hitting the King Fahd Causeway that links Saudi Arabia and Bahrain… as well as power plants in Kuwait and the United Arab Emirates.
“Looks like it is going to be a very hot July,” writes former CIA officer Larry Johnson on his blog.
We’re back tomorrow with our Saturday highlights edition — where we’ll unpack a ballot measure that’s touched off a backlash from California’s billionaire class. (And it could be coming to a state near you.) Catch you then…
