Once hailed as the prized possessions of the blue chip index, General Electric (GE) and IBM faced a period of decline due to management missteps. However, these corporate behemoths are now undergoing a resurgence, reclaiming their lost stature from a decade ago.
By , Forbes Staff
With attention fixated on the Magnificent Seven megatech companies, GE and IBM, once the epitome of blue-chip stocks, are stealthily climbing back up the rankings, shedding the rust accumulated over the past decade.
At the turn of the 21st century, GE and IBM held prestigious positions among the world’s largest companies. General Electric, a founding member of the Dow in 1896, thrived as a diversified conglomerate during the dotcom boom, acquiring entities like NBC and Kidder Peabody. By the retirement of its long-standing CEO Jack Welch in 2001, GE’s market capitalization had soared to over \(600 billion. On the other hand, International Business Machines, although a later addition to the index in 1932, reigned as America’s most valuable corporation throughout the 1970s and 1980s, with market caps fluctuating from \)22.35 billion in September 1974 to $105.9 billion in August 1987, just before the Black Monday crash.
Yet, these 20th-century titans encountered challenges in the new era. GE’s substantial and highly leveraged GE Capital, coupled with a significant portfolio of subprime loans, faltered during the financial crisis, leading to its eventual disintegration and divestiture. Additionally, a new wave of technology enterprises swiftly outpaced these traditional giants, especially in sectors like cloud computing.
Now, more than two decades since their peak performance, GE and IBM are scripting their revival narratives. Expelled from the Dow in 2018 after a remarkable 111-year stint, GE is approaching its highest post-crisis stock valuation, eager to leave behind a seven-year downturn. Similarly, IBM is on a trajectory towards a stock peak it last witnessed over a decade ago. During the tumultuous period from 2016 to 2018, GE’s shares plummeted by 75%, and IBM faced a 32% decline, contrasting with the Dow’s 18% uptick. Fast forward to the present, GE’s value has tripled since 2018, and IBM’s has surged by 82%, surpassing the Dow’s 67% growth.
REVIVAL OF THE OLD GUARD
GE and IBM’s stock prices are once again surpassing the Dow Jones Industrial Average after years of underperformance
Are these former Dow dinosaurs experiencing a transient resurgence, or are they embarking on a steady path back to eminence?
The resurgence in GE and IBM’s stock prices is not solely attributable to their financial performance. While improved bottom lines present a positive outlook and could justify the surge in their stock prices, the reality is more intricate. For instance, GE reported a \(799 million loss in 2022 but rebounded with a \)10.2 billion profit in 2023, largely fueled by gains from spinning off its healthcare division. Similarly, IBM faced challenges, including a \(16 billion pension liability transfer to Met Life and Prudential in 2022. However, by 2023, its profits had escalated by nearly \)2 billion based on GAAP metrics.
Big Blue
Chilton Investment Company, a diversified investment firm based in Stamford, Connecticut, managing over \(1 billion in assets, invested approximately \)50 million in IBM in the second quarter of 2023 when shares were trading around $130, according to regulatory filings. Subsequently, they continued to increase their holdings each quarter. Since their initial investment, IBM’s stock has surged by 50%.
Jennifer Foster, co-chief investment officer at Chilton since 2016, highlighted the persistent doubts surrounding IBM’s potential for revenue growth that deterred many investors. Between 2011 and 2020, the company’s annual sales halved from \(107 billion to \)55 billion, largely due to missing opportunities in the cloud computing boom that propelled the likes of Amazon, Alphabet, and Microsoft. IBM’s market share in data processing and hosting services plummeted from 11% in 2019—nearly double that of its closest competitor, Salesforce—to 6.9% in 2023, maintaining its lead but facing stiff competition from Amazon, according to IBISWorld data.
As IBM’s market dominance dwindled, so did morale at its headquarters in Armonk, New York. The company’s Glassdoor rating, reflecting employee satisfaction, stood at a low at the end of 2018 but has since risen to 4.1, surpassing tech giants like Meta and Oracle and on par with Salesforce. This transformation is evident even to external observers. Foster’s interest in IBM stock was piqued after receiving insights from a friend who attended the firm’s 2023 Think conference in Orlando.
Foster shared, “We engaged with the stock based on feedback from a close friend who is a seasoned technology investor and attended the IBM Think conference last year. Her observation was that ‘the employees at IBM exuded a newfound confidence.’ This intrigued me. While we monitored the stock for years, we refrained from long positions due to uncertainties surrounding revenue growth.”
In response to Foster’s observation, James Kavanaugh, IBM’s CFO, emphasized the noticeable shift in sentiment across investors, clients, and employees.
Kavanaugh remarked, “The shift in sentiment is palpable from the perspectives of investors, clients, and our employee engagement metrics. There is a noticeable positive outlook. We have undergone fundamental transformations and are experiencing significant momentum.”
Foster attributed the pivotal moment in revenue growth to the acquisition of Red Hat in 2019. Red Hat, renowned for its open-source cloud data management platform, not only bolstered IBM’s software revenue from \(18.5 billion in 2018 to \)26.3 billion in the last fiscal year but also paved the way for Arvind Krishna’s appointment as CEO.
“Many, including myself, were skeptical about the Red Hat deal—questions lingered about its cost-effectiveness and strategic value. However, it quickly demonstrated its worth to IBM. In 2020, Arvind Krishna assumed the role of CEO, having orchestrated the Red Hat acquisition. Amid the chaos of the pandemic, Arvind Krishna’s appointment might have been overlooked. He is unique in that, despite his long tenure at IBM, he is a technologist at heart.”
Krishna, holding a doctorate in electrical engineering from the University of Illinois, previously served as the senior vice president and director at IBM Research, overseeing thousands of scientists across the company’s 12 research labs. Unlike his predecessors, who primarily hailed from sales or managerial backgrounds, Krishna’s technical expertise brought a fresh perspective to IBM’s leadership.
Foster elaborated, “Krishna comprehended the Red Hat strategy and its potential impact on IBM. Red Hat introduced a modern operating system that IBM lacked, restoring its relevance in the market.”
Kavanaugh elucidated the rationale behind the Red Hat acquisition, emphasizing IBM’s foresight regarding the evolving landscape of cloud computing post the initial surge.
“IBM and Red Hat were a formidable combination. When we announced the acquisition in mid-2018, we were only five years into the initial phase of cloud expansion. While the industry was gravitating towards public cloud providers like AWS, Microsoft, and Google, we envisioned a multi-cloud world where enterprises would engage multiple service providers. Red Hat’s expertise in managing such infrastructure aligned with our strategic vision. Today, the market indeed reflects this multi-cloud reality.”
Moshe Katri, an analyst at Wedbush Securities monitoring IBM, adopted a cautious stance towards the Red Hat acquisition and IBM’s future prospects. Maintaining a neutral rating on the stock with a price target of $140—25% below the current trading price—Katri acknowledged Red Hat’s decelerated growth post-acquisition but highlighted its contribution to IBM’s consistent revenue stream, appealing to investors.
“This isn’t a high-growth narrative. IBM remains a company with modest single-digit revenue growth. However, sustaining steady revenue growth could suffice to sustain IBM’s stock momentum, especially with a 3.4% dividend yield. Looking ahead, IBM’s CFO Kavanaugh identified ‘Gen AI’ as a pivotal catalyst, alongside the company’s pioneering efforts in quantum computing.”
General Electric
While IBM’s narrative revolves around expansion, General Electric’s story is one of consolidation.
Larry Culp, appointed as GE’s first external CEO in October 2018, embarked on a strategic reversal of his predecessors’ acquisitions, streamlining GE through asset divestitures and a bold initiative to split the conglomerate into three distinct entities. Culp’s assertive approach aims to reshape GE into a leaner and more focused entity.
GE eschewed ostentatious acquisitions in favor of strategic divestments to address its towering debt burden. Although comparing GE’s historical and current debt levels, especially considering the shadow cast by GE Capital (largely divested around 2015), is complex, the reduction is substantial—from over \(500 billion in 2009 (equivalent to the current national debt) to a manageable \)23 billion today.
The future trajectory of GE will concentrate solely on aerospace and defense. The biopharma division was sold to Danaher in 2020, a company previously led by GE’s CEO Larry Culp from 2000 to 2014. The healthcare unit was divested in 2023, while the energy segment, rebranded as GE Vernova, is slated to become a separate entity.
Ken Herbert, an aerospace analyst at RBC Capital Markets, envisions a prosperous future for GE’s aerospace business, set to trade under the GE ticker. Herbert currently rates the company as a “buy” with a $180 price target.
He remarked, “GE is creating a pure-play, large-cap aerospace and defense entity at a time when quality options are scarce. The aerospace services sector is thriving, with a surge in demand for legacy engines at airlines due to delays in new engine part deliveries. This trend plays to GE’s strengths, positioning its aerospace division for success amidst its competitors’ challenges.”
Despite GE’s stock surge, validating Culp’s strategic dissection of the company, skeptics remain.
Ugeux, founder of Galileo Global Advisors and former managing director at GE’s Kidder, Peabody & Co. investment bank in Europe, remains cautious about the long-term viability of GE’s dismantling strategy.
Ugeux cautioned, “Corporate splits are akin to surgery—they entail high costs and induce pain. Unless there is a compelling rationale, such drastic measures should be avoided. However, splitting companies is a common tactic among investment bankers. Culp might have succumbed to their influence.”
For Ugeux, GE’s recent revival marks a recovery from a dismal 2022 when its annual EBITDA on a GAAP basis hit its lowest point since 1985.
He reflected, “The stock price surge in response to the poor performance in 2022 was results-driven. However, maintaining a 20 times price-to-earnings multiple was merely a reflection of improved figures. The pivotal question now is whether investing in GE post-split and divestitures will yield higher returns. 2022 was marred by restructuring costs, while 2023 showcased signs of recovery. The true test lies in 2024.”
Herbert from RBC suggested that GE might pivot towards acquisitions or consider returning capital to shareholders through buybacks or increased dividends. Currently offering a quarterly dividend of $0.08, yielding 0.19% annually, GE is expected to shift focus towards strategic capital allocation post the energy unit spin-off in April.
He pondered, “With ample cash reserves, what will GE do next? While a consolidation phase is plausible, Larry Culp and the management team are well-equipped to navigate the company’s future challenges.”