For a brief moment, the sentence read as though the head honcho of International Business Machines Corp. (NYSE: IBM) was railing against the unrealistic stock prices of Web companies:
"In his remarks, (Lou) Gerstner took issue with the explosive valuations assigned to Internet stocks..."
Other than the people who trade in those issues, everyone would probably agree with the view expressed by IBM's chairman and CEO -- if it stopped there. Unfortunately, it didn't:
"...and argued that 60 percent of the huge amount of spending expected on e-busineses was estimated to come from computer services work, with the remainder from hardware and software."
| IBM: An Internet stock? |
So actually Gerstner's problem isn't so much that Internet stocks are overvalued in an absolute or objective sense; he's just wants a bigger cut for his own company. Or at least that's what it seems like -- I wasn't at IBM's analyst meeting yesterday, so I'm taking Reuters' word for it. But isn't that why we pay for a wire service?
Viewed through Gerstner's crystal, the picture looks encouraging. A prediction of double-digit growth means IBM expects to add at least $8.1 billion in sales this year, which is a figure most Internet companies' CEOs only fantasize about. Investors responded to Big Blue's forecast with big smiles, driving shares of IBM up almost 6 percent by mid-afternoon today.
For all the deserved positive feeling, remember that it's still just a 10 percent increase. Compare that to Yahoo's annual growth of 188 percent last year, or even its sequential growth ranging between 30 and 40 percent. That difference alone accounts for a small part of the gap between IBM's price-to-estimated-earnings multiple of 31, and Yahoo's P-E of 420.
Part of it is simply investing in what you know. The Yahoos and America Onlines are easy to grok, because the average person uses them; on the other hand, who has an RS/6000 or AS/400 at home? Big Blue's other divisions are no easier to figure out. Services can mean almost anything, while software includes companies like Tivoli, which remains the exclusive province of network administrators. Can you truly say that you know what goes in all of those businesses? For that matter, can Gerstner?
Even those few IBM subsidiaries that are closer to popular understanding -- they're not quite there, after all, this is IBM -- look like anchors holding back the rest of the ship. A lagging memory chip division that probably won't be around in five years. A mainframe unit trying to refashion itself as a provider of high-end servers, because traditional Big Iron sales are flat at best, declining at worst. A PC business for which the company refuses to forecast profitability.
Such albatrosses don't weigh on the companies with out-of-this-universe valuations. Despite all that, Gerstner wants us to see IBM as an Internet company, because IBM supposedly traces a quarter of its profit to "e-business." My boss jokingly suggests Big Blue steal AOL's slogan: The Internet and So Much More.
Why bother? IBM isn't an Internet company any more than any other large player in software, hardware or IT services. Some, like Microsoft and Sun Microsystems, can make much better cases for being Internet plays than IBM can.
But it shouldn't matter, because Gerstner was right to "take issue" with Internet stocks' valuations. He also should be happy with the price for a great company like IBM. At almost $240 a share, it certainly isn't cheap.
Seekest thou more? Sate thy desires with these ambrosia of thought (Wow, how pretentious can I get?):
Overall, the technology market looked positive going into the last two hours of regular trading. The Nasdaq Composite Index had gained 22.70 to 2629.24, the S&P 500 was up 9.99 to 1373.99, and the Dow Jones Industrial Average moved up 115.98 to 11116.35. 22GO>