"She has more lives than a cat": An investor from *The Short Game* on IBM's collapse

American financier Michael Burry, whose bet against the mortgage market became one of the central storylines of the movie *The Big Short*, believes that the record plunge in IBM’s stock is out of proportion to the company’s earnings decline. In an analysis published on July 15 on his blog, Cassandra Unchained, on Substack, he described IBM’s computer business as experiencing temporary weakness but acknowledged real risks to its software and consulting divisions posed by artificial intelligence. Burry did not buy shares during the sell-off.

"On July 7, IBM shares were trading at $312. On the morning of July 14, the stock dropped to $213—an ill-fated palindrome," Burry wrote.

The company lost a quarter of its market capitalization in a single day. The sell-off was triggered by a sharp reversal in IBM’s Z mainframe division—which produces on-premises computers for large enterprises: IBM warned that a 15% revenue increase in the first quarter would be followed by a 7% decline in the second. It attributed the decline to customers redirecting their budgets toward purchasing in-demand AI equipment.

Without additional context, this could be mistaken for a shift in spending from “old-school” IBM mainframes to cloud infrastructure for AI. “An existential threat”—that’s how Burry describes the market’s initial reaction. However, in his view, there’s another explanation for what’s happening: IBM Z is IBM’s most volatile and cyclical segment.

Burry examines the current crisis through the lens of IBM’s past transformations. In the late 1960s, the company shifted to selling software and hardware separately, and in the 1990s, it restructured its declining mainframe business by focusing on software and consulting. “What sets IBM apart is that it may have more lives than the proverbial cat,” writes the financial analyst. According to him, the company has already “risen from the ashes many times.” “Perhaps IBM is on the verge of yet another forced transformation. Will the phoenix really have to burn to the ground again?” Burry wonders.

His argument is that IBM Z has experienced sharp fluctuations before. “Z has staggered like a drunken sailor before, and it has always recovered,” the post states. The entire division accounts for only about 8% of IBM’s revenue, but after the warning about an expected $700 million shortfall in revenue, the company’s market capitalization plummeted by $69 billion, according to The Wall Street Journal. “Nothing in today’s results should have triggered the sharpest drop in IBM’s stock price in history,” the financier asserts.

He points out that IBM still has high-margin business segments. The software division generates about $30 billion in revenue, is growing by roughly 10%, and operates with a gross margin of 84%. The mainframe division’s gross margin is 59%. According to the company, IBM Z handles 70% of the world’s transactions. Switching to other systems involves “enormous costs—if it’s even possible,” notes Burry.

Burry has more questions about IBM’s software business. The company now forecasts growth of just 5% in that segment, and shortly before that, it was reported that Starbucks is considering replacing IBM’s products and services with an AI-based solution. This problem has become “too real to ignore,” the financier emphasized.

Investors may fear that publicly available AI models will eventually drive some of IBM’s products out of the market. “Have recent developments in the LLM investment boom really caught Big Blue (as IBM is known—Oninvest) so off guard that this new paradigm will burn this ancient phoenix to the ground one last time?” writes Burry.

He considers Anthropic’s tool for modernizing COBOL applications to be a particularly serious threat: it “has truly breached IBM’s deepest moat.” Transaction processing provides the company with a steady stream of revenue. “If AI offers a way to move away from COBOL, it will hit IBM hard. It’s very hard for me to imagine that. But it’s a truly terrifying threat,” warns the legendary short seller.

Even after the crash, IBM shares remained too expensive for Burry. At $218.29, the stock was trading at a multiple of 21–22 times adjusted earnings, whereas he estimated its fair value at $120. “The price I’m looking for isn’t there yet. I didn’t buy IBM today,” the investor said.

Burry suggests keeping an eye on the earnings reports from SAP, ServiceNow, Microsoft, Wipro, Infosys, Cognizant, and Capgemini to see if they have experienced the same shift in customer spending as IBM. The financial results from Samsung and SK Hynix may reveal whether money has indeed flowed to suppliers of memory chips and other components, while reports from cybersecurity companies may show whether new threats have diverted customers’ attention.

If IBM’s explanations are not substantiated, investors will stop taking the company at its word and will wait for tangible signs of recovery. In that case, its P/E ratio could drop to a single-digit figure, and the stock could fall by another 50% or so, Burry warned.

This article was AI-translated and verified by a human editor