Have I not been clear enough?
Is it too esoteric?
Do your fellow investors just not want to believe it?
Anyways, I just don’t feel most investors really understand this situation at all.
If they did, they’d be acting much differently.
So here, let me explain it another way using one prominent example.
A Tale of Two Stocks
Warren Buffett is the world’s greatest living investor. For decades he delivered outsized returns.
His process was simple. Buy shares in big companies with dominant positions and ride out the ups and downs of the market.
His time horizon is measured in decades though.
Most of us don’t have that advantage and that’s why what I’m about to explain to you is so critical.
To understand it, you just have to look at the recent history of two tech stocks, International Business Machines (IBM) and Amazon (AMZN), and how the companies are capitalizing on the cloud computing boom.
We touched on this subject a few weeks ago when I showed you Amazon’s Dirty (And Ultra-Lucrative) Secret:
[The cloud computing boom] is creating a huge divide between the winners and losers.
A few big tech companies which didn’t move into the cloud early enough are getting left behind. Think of tech heavyweights like IBM, HP, and EMC.
Their shares reflect that too.
The S&P 500 is up 0.5% for the year so far.
[The companies which jumped in big and early on the cloud computing trend including] Alphabet, Microsoft, and Amazon are up 15%, 36%, and 96% respectively.
IBM, HP, and EMC, who missed out on the cloud boom, are down an average of 12% each on the year.
The divide between the winners and the losers in this is dramatic.
But it’s actually part of a much bigger -- and potentially costly -- trend investors should be paying close attention to right now.
Let’s turn back to Amazon and IBM to see what I mean.
Amazon shares have been on a tear over the last year. They’re up from $300 to more than $660 today.
Now, Amazon’s core business as an online marketplace has been doing well. Sales are going up every year and it’s the dominant Internet retailer.
That business, however, doesn’t make any money at all. Amazon is competing on price and convenience. And it’s winning.
The cost of winning are margins that are non-existent.
In time, that may change. For now and the foreseeable future, it won’t.
Amazon’s earnings have been driven almost entirely by its Amazon Web Services division.
This division is the cloud computing segment which provides the servers and technology for companies like Netflix (NFLX) and others.
It has been the primary driver for Amazon’s shares.
It took billions of dollars for Amazon to build these server farms and the infrastructure necessary.
But it’s paying off big for Amazon. The division has generated $7.3 billion in revenues this year and set to pass $17 billion in 2017.
In fact, every company that invested heavily in the cloud computing is doing quite well.
IBM, however, is a totally different story.
It’s one of the few tech companies which has survived and thrived in every major tech innovation for nearly a century.
It’s quite an achievement.
It’s stock has had it’s ups and downs over that time too. But a lot more ups than downs over time.
Recently something has changed for IBM’s stock and it should mean a lot to investors who own any stocks at all.
As mentioned above, IBM has had a tough run of it lately.
It was left behind in the cloud computing boom.
IBM generates only a fraction of revenue from its cloud computing division compared to what Amazon does and it started out as just a side business for Amazon.
This is causing big problems for IBM.
Without the dominant position in the cloud-computing boom, IBM is getting hammered regularly every time it reveals its quarterly numbers.
IBM shares reflect that position too. They’re down 23% from their 2015 highs.
That’s bad. But here’s the real rub in all this though and why it’s important for all investors to understand it right now.
How did IBM miss out on the cloud computing boom?
The problem was, I believe, IBM was focused on “investing” in something else entirely for short term gain and long term pain.
You see, between 2012 and 2014 IBM spent about $36 billion buying its own stock.
During that three year share buyback frenzy IBM shares traded between $172 and $215.
Basically, IBM spent billions of dollars of cash to inflate its share price while missing out on building a leading position in the biggest tech boom of the last decade.
That’s bad. But it gets worse.
IBM shares have dropped considerably since then.
It’s stock is down to $137 -- its lowest price in more than five years -- as I write.
However, the company isn’t buying back nearly as many shares anymore.
In the first nine months of 2015 IBM bought less than $3.6 billion of its own stock back out of the market.
That’s well short of the $12 billion a year pace it was averaging in the three years before it.
What’s the problem here? Were IBM’s shares really worth $200+? Was it just inflating its own share price with $36 billion in cash? Why was it buying so many shares instead of building server farms to support the cloud computing boom?
None of the answers to those questions are good.
Regrettably, IBM isn’t alone here.
Let The Pain Begin....
IBM’s recent story isn’t a special case. I’m afraid the IBM example has and will increasingly be the the norm.
Earlier this week we looked at Caterpillar (CAT) which went through a very similar situation.
There are many, many more cases like these coming up too.
Overall, there have been more than $3.5 trillion worth of share buyback programs executed over the past few years.
They have pushed some stock prices higher than they should have been at the expense of the health of the underlying business.
It can’t and won’t last.
And we foresee the end coming sooner (much sooner) than later.
Investors have to start realizing what all this means before it’s too late.
Your financial success in the next few years depends on it.