Alex Cho
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Aren't There Still Problems with IBM and HP Enterprise?

I’ve been raising questions about IBM’s middleware business for quite some time. Just how sticky is the Unix platform in a world where IT customers are pivoting away from service contracts and vendor lock-ins? Furthermore, isn’t AWS killing it? Likewise, isn’t HP Enterprise going to struggle with white box commoditization for server hardware? Why are people jumping on the bandwagon due to cost cuts when there are clear strategic red flags for both companies?

But then again, I’m not the only one with these concerns. Here’s what Barclays released in a recent report:

Stock rallies in IBM and HP Enterprise could ease. The risk-on trade has benefitted both IBM and HP Enterprise. We are concerned IBM’s middleware business will slide into a chronic decline though and one the recent bevy of acquisitions may not be able to overcome. If middleware worsens, the stock could come under pressure, as the declines would signal a structural issue that is bigger than any lift from Watson in the next few years. Meanwhile, HP Enterprise is accelerating cost take-outs, borrowing from the Hurd play book. While investors are attracted to the discounted valuation metrics and decent cash flow metrics, we think HP Enterprise ultimately needs to invest in the business, meaning the cash flow and stock buyback narrative could be shelved.

Yeah, it’s time to get a little less aggressive on conventional IT. Yeah, the valuations are cheap, but the gloomy forecasts on some of these core businesses should give investors some pause.