IBM’s AI Pullback, Quantum Leap, Confluence Acquisition “Muddies” Earnings Outlook

due out on Wednesday in our tech spotlight. Joining me right now, Forrest, founder chief investment officer Boka Capital Partners. Good afternoon to you, Kim. Great to k here at IBM. Some of your thoughts here. Sure. Well it's it's a really tough quarter. The third quarter is always the most difficult for enterprise. Well they're software but they're also hardware. So we'll call it enterprise IT companies. Why is that. Well f the everybody's out on vacation. So it really hard to get signed in the third quarter because half ofhe team is missing or whatever. It doesn't matter. But it's always a tough Making it tougher is the rollout of AI. So it would be a nice theory that companies. Because that's IBM serves, that companies would continue their basic spendinghile of software and hardware. Butd practically that is not what happens. They will cut back on, you know, the ordinary of just keeping things going, spending. And I think IBM might be suffering from that in this third quarter. And then finally, there's the issue of AI. Well, do they do AI kind of, sort of,o lean on quantum. And I have to tell you, I'm a fan of quantum, but I think it's a solid ten years to 15 years before it really moves the needle in any kind of practical way. So IBM has a tough road for this next earnings announcement. Yeah. I thought it was interesting that you mentioned quantum. I had that in my notes for you because youaid, look, they're ready for it. But I don't really see them taking off with that for large scale deployment. What would change the story? Because y do see it ate point, just not right now. What will change that? They will have maybe more footprint in quantum? Sure. Well, I the whole field of quantum is greatly misunderstood. While it can do really cool things, if you're going to deploy i actually have to make sure it's actuallyng the thing that you expect. And how do you do that? Well, you take an ordinary computer and you do run lots of model run thrus about what's happening over on the quantum side. And quite honestly, probably AI has helped quantum kind of get further than it have because the chips are so much faster better. So you need a lot of compute power to prove what's happening in quantum before people are going to actu start building on top quans really nerdy, but it is a gating factor for quantum being delivered. But IBM is ahead of a lot of its competitors, certainly in that area. I mean, it seems that IBM's software business has been gaining they've had a meaningful shift toward higher margins and recurring business. And we had the Red hat acquisition, and that has brought at least some growth, right. You kno we are the numbers going and the data software data software growth isng good. And the 2026 cash flow outlook, 1 billion is expected in annual increases. And so are things going in the right direction for IBM. I mean, what do you think of it at this price point at 237 d't necessarily mean if things are going in the right direction, the stock goes up. R Exactly. And you know, it's great that you bring up software. They have making some gains there. But in the last couple of quarters the gains have reducing, right? So it's the change of gains. It's maintaining that upward. It's upward but ns much as the prior quarter. So that's a concern. Addin to it, they did a acquisition of a company called confluence. And that's going to muddy the water. It's going to make it difficult for analysts to determine if things are getting better or worse. So it's anareaM should pay a lot of attention to this quarter to see if software and we love margins of software, if that's improving for the company or n Yeah. How about Watson X? I don't realr that much about it. When we talk about AI. I mean, s certainly a feeling that IBM and AI is something that will help to continue to boost growth g forward for the company. But where does Watson X fall? Is AI a major growth opportunity when it comes to it helps businesses to develop andloy and govern these AI applications. good enough? I, I don't think so, because we don't really abos kind of sad because it was probably aecade or so ago when they rolled it out and it really was, you know, pretty amazing. But they really dropped the ball and certainly have not put a whole lot of time and attentiono trying to make it grow with the same verve that, let's say, open AI, anthropic, and even existing companies like Meta andMicrosof. So I think they really were tr to scale back. Their AI, and they just got caught and, you know, to save money because it wasn't going anywhere like five years ago. And they dropped the ball a littl too early. But can it be picked up? Sure it can be. actually, what they're really known for is working with their longtime customers, really large international companies, to be able to keep their tech stack fresh. And I think because they have AI i in house, they'll be able to help their customers adopt AI. And that's an area for their services that they should really start ramping up. Yeah, I'm thinking it's about $100 off. Its 52 week hat 237. The high was 332. So let's say $100 off the highs and only about $40 up off the lows. At this point you think IBM c recapture those highs 303 30? If so, when? Well? When? Well, sadly, I think there if you're trying to invest in AI, peoplee put their attention elsewhere as the lead in to this segment. You guys were talking about memories back and software is back. So, you know, IBM is going to really have to for attention with investors to say, you know, be an owner of our company and we will be o help you grow with respect to, you know, your portfoliing good AI coverage. Well, let's see what happens. I'm not hopeful. It seems like investors are more momentum driven. Andt kind We're definitely not a momslot. name that you've men to me over the many years. One was Intel. I would liko know if you think that's buy, sell or hold, but also Crown Castle. Now, you were the first to really talk to me and explain to me about t towers. And it was a long time ago. It was probably seven years ago. They weren't really on my radar, I have to be honest, at that time. And you said these towers are going to really make a difference when it came to tech and teled all that. And last week, when SpaceX started to announce that maybe they would get m into tech and telecom, and we saw names like AT&T Verizon, T-Mobile coming down, Crown Castle, a name you've brought to my attent before searched. fact, it's up 21% this month. I wanted to know your thoug Crown Castle at this point, if you have any. If you don't want tont on either this or Intel, please don't. But just Crown Castle Intel just quickly. I love being on y show because it's like pop quiz. So of course I'm going to answer these things. Let's start first with Castle. Why did it go up? Well,e's the funny thing. Even though you think Starlink might be going to roll out a satellite device to your car or your phone, pally, that's not always going to happen. Well, they're going to use the terrestrial meaning ground network. And so the the tower people will have one more company to have, you know, rented space out to becauseat'sy put up towers, have electricity. And then, you know, the, the mobile providers rent the space. So they are increasing by, you know what? It would be 25%, the ability to sell their product, whic space on the next to highways to space. So that's kind of cool. So yeah, we kind of like it becauseotal addressable market has grown tremendously. And Intel is a ly e been hanging with them forever because I thought their skill in being able to create fabs, which is the, the actual cr of the chip, not just the design of the chip they had fallen behind, but I thought they could catch up. I think that's true. And I also think beca the focus away from Taiwan, we don't wantild any more fabs on Taiwan. You know, the US is a great pla Intel has a foothold here. they have a shot. I think it's like I would rate if I was a sell side analyst. Again they might be a hold or you know kind of hold with a plus next to them where we're looking for other catalysts t get us really interested in Intel, but they have some basics tke them far from a sell at this point. Is that is that cogent? Did you follow me there? No, very I think that was very succinct. And look, the stock's up 150% this year. It's a name you've watched. And if you're you know, viewers are holding on to it. They got 150% gain. Not bad. So you know but look JP Morgan has an $85 target it's at $92. So all right. Butym believer in need to see some more on that. Kim far it's great to chat with you always. Thank you.