IBM’s $31 Billion Loss: Is It Time to Buy the Dip?

IBM (IBM +2.47%) experienced a significant downturn during Monday’s trading session as concerns mounted that AI tools might disrupt its established business-oriented programming infrastructure, notably its common business-oriented language (COBOL) solutions. The company’s share price plummeted by over 13%, resulting in an approximate $31 billion reduction in its market capitalization.

Following this sharp decline, IBM’s stock is showing signs of recovery, rising by 2.7% as of 3 p.m. ET. However, over the course of this year, the stock is still down about 22%.

Image source: Getty Images.

Concerns Over Anthropic and Other AI Innovators Disrupting IBM

In a recent blog entry, Anthropic suggested that AI technologies can be instrumental in modernizing systems reliant on COBOL code. Anthropic, known for its Claude AI platform, emphasized that its coding tools could facilitate automating the processes of experimentation, analysis, and implementation necessary for updating COBOL-based systems. The post also highlighted the limited number of universities teaching COBOL, contributing to a shrinking pool of engineers proficient in this legacy code.

In response, IBM remarked that translating COBOL is straightforward; however, the true challenge lies in areas such as data architecture redesign, runtime replacement, transaction processing integrity, and performance enhancements developed over decades of integrated software and hardware. A spokesperson for IBM also acknowledged the continual emergence of new AI tools, referencing the introduction of its watsonX Code Assistant for Z mainframes two years prior as an illustration of its own efforts to leverage AI for code modernization.

Is IBM Stock a Good Investment Following Recent Declines?

Despite IBM’s cloud software units being pivotal to its recent growth, mainframe sales still contribute significantly to its overall revenue. Investors are increasingly concerned that advancements in AI could adversely affect these mainframe-related earnings. Last year, mainframe sales represented 23% of the company’s total revenue, while mainframe software constituted about 29% of overall software sales.

International Business Machines

Today’s Change

(2.47%) $5.52

Current Price

$228.87

Key Data Points

Market Cap

$209B

Day’s Range

$223.65 – $236.54

52wk Range

$214.50 – $324.90

Volume

658K

Avg Vol

4.8M

Gross Margin

58.06%

Dividend Yield

3.01%

Although IBM has experienced a considerable decline in valuation this year, the stock has still risen by 76% over the past three years. Currently, its share price is approximately 18.5 times the expected earnings for this year. The company offers a dividend with a yield of around 2.9%, although its sales and earnings growth are more subdued when compared to other tech firms capitalizing on AI advancements.

Last year, IBM reported revenues of $67.5 billion, marking an 8% year-on-year increase (or 6% when adjusted for currency fluctuations). The company anticipates currency-adjusted revenue growth of roughly 5% for the upcoming year, with free cash flow projected to reach around $15.7 billion, representing a year-over-year increase of approximately 7%.

The influence of Claude Code and other AI solutions on COBOL and IBM’s mainframe business remains uncertain at this juncture. It may be that market reactions to this potential disruption have been exaggerated. IBM’s established legacy sales base, strong reputation for reliability, and proprietary tools could help it navigate shifts driven by AI modernization.

Conversely, the threats posed by emerging AI technologies to IBM’s consulting and software services cannot be entirely dismissed. With growth trajectories looking relatively modest compared to other major technology players, there may be more attractive investment opportunities available at this time.