Long-running tech giants IBM and Intel are still searching for a return to their glory days, caught in a cycle of creative destruction.
Last week, both companies reported earnings that failed to excite investors. IBM reported earnings and revenues that beat analyst estimates, but its stock dropped, as investors thought that the job cuts the retail giant announced didn’t go far enough to make a dent in narrowing profit margins.
“Most investors had higher expectations for IBM’s cost-cutting goals going into the print,” Mark Pacitti, CFA, founder, and CEO of Woozle Research, told International Business Times. “The market’s reaction to the company’s announced job cuts fell short of projections – amounting to only 1.5% of their total workforce seems paltry compared to those announced by Amazon, Meta, Microsoft, and Salesforce. Clients will expect far bolder savings initiatives in the coming quarters.”
Meanwhile, Intel reported earnings that some market observers called “brutal results,” sending its shares sharply lower.
Last week, the decline in IBM and Intel’s shares came at a time when the tech sector has been rallying, as lower long-term interest rates have raised investor appetite for risky assets like tech companies. In addition, the shares of the two companies have underperformed the broader market over the long term.
The two tech giants are in the middle of what some economists and business strategists call “creative destruction,” which sheds old mature businesses for new emerging opportunities. It’s a long process that has slowed down sales growth.
In recent years, IBM has been focusing on its artificial intelligence and hybrid cloud computing capabilities. IMB has been investing in R&D in these areas to maintain its competitive edge.
For example, in July 2019, IBM paid $34 billion to acquire Red Hat, which helped the IT giant transition from mature low-margin segments to emerging high-margin segments of the IT industry. Red Hat brought IBM the world’s most extensive open-source technology portfolio, a great hybrid cloud platform, and a vast open-source developer universe.
Similarly, Intel is investing in emerging technologies such as quantum computing and new products and services to capitalize on the growing demand for data center and internet of things (IoT) solutions. In addition, Intel has invested heavily in developing low-power, mobile-optimized processors and acquired companies to enhance its mobile chip division capabilities.
Intel faced fierce competition from Advanced Micro Devices (AMD) and Arm-based processors. As a result, Intel’s stock has lagged behind AMD and Nvidia in a couple of standard financial and economic metrics, including average annual total return over the last decade and Economic Value Added, a measure of how effectively a company manages shareholder and debtholder capital.
The search by the two companies for returning to the old glory days is a work in progress, especially for Intel, which is still in its early days of creative destruction, as its CEO Pat Gelsinger stated more than a year ago: “We are still in the early stages of our journey, but I see the enormous opportunity ahead, and I couldn’t be prouder of the progress we are making towards that opportunity.”