Hedge Fund Guru Bets Against IBM over Cloud Computing

The high-profile founder of a hedge fund boasting a 30-year history of success said he’s shorting IBM (IBM) shares in a bet against the company’s ability to transition its offerings to cloud-based technology.

According to a Bloomberg account, Stan Druckenmiller, Duquesne Family Office chairman and chief executive and Duquesne Capital Management founder, speaking at the inaugural Robin Hood Investors Conference in New York on Nov. 22, called IBM “old technology being replaced by cloud technology.”

He described his bet against IBM’s stock as “one of the more higher-probability shorts I have seen in years.”

Does Druckenmiller have a point? Is the cloud a serious problem for IBM?

Including its most recent Q3 2013 performance, under chief executive Ginni Rometty IBM has posted six straight quarters of negative revenue growth and seven straight quarters in which the company has missed Wall Street’s revenue expectations.

The fundamentals behind the vendor’s nearly two-year slide—a clunky shift from Unix to Linux and cloud computing—seems to have convinced Druckenmiller that IBM’s an IT dinosaur.

Indeed, the numbers may back him up—cloud computing sure seems to be squeezing the vendor’s hardware business. The most recent evidence is clear: In Q3 2013, IBM’s systems revenue fell 19 percent, with its Power line falling 38 percent, System x sliding 18 percent and storage falling 11 percent. Among its hardware platforms, only System z mainframe server products showed some life, with a 6 percent uptick.

But the hardware sales dropoff isn’t IBM’s only problem. While the vendor is trimming expenses as hardware revenue declines—laying off and furloughing employees—cloud service providers such as Amazon (AMZN) Web Services and Google (GOOG) are hiring.

And its cloud revenue figures may be not quite as sturdy as the vendor suggests. In Q3 IBM pointed to about $1 billion in cloud revenue, but only half of that emanated from cloud services, with the remainder coming from hardware and software sales. Because IBM doesn’t specifically break out cloud revenue, it’s difficult to tell how the company is doing there. Indeed, the SEC began an investigation in May into how IBM reports cloud computing revenue.

Expert Says Bet on Amazon and Google, Not on IBM

In contrast to IBM, Druckenmiller heaped praise on Amazon and its chief executive Jeff Bezos and Google, drawing particularly attention to the latter’s technology development.

Amazon’s Web Services division “is killing it,” Druckenmiller said, according to the Bloomberg account, as he urged IBM to take on the “challenge of the Amazons of the world.” In calling Google the most “innovative company on the planet,” Druckenmiller said investors betting on innovation should side with Google while those betting against innovation should buy IBM shares.

Druckenmiller closed his hedge fund in 2010 after a 24-year run and now manages his own wealth through his Duquesne Family Office. He produced average annual returns of 30 percent at the hedge fund, according to Bloomberg.