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After a middling performance in recent years, the tech giant’s next phase threatens to be much less rewarding for shareholders, some analysts say.PAUL SAKUMA/AP

The computer company that pulled off one of the most famous reinventions in tech industry history now looks to be in need of a fresh burst of innovation.

After pioneering the personal computer in the 1980s, International Business Machines Corp. presciently moved out of such commodity businesses and steadily built a new life as a seller of high-margin software and services. That second act has given Big Blue, as IBM is known, a lengthier-than-expected life as a blue chip and enriched its patient shareholders.

The company's performance in the last two years has been middling, however, and some analysts see signs of the beginning of a new, third act – one that threatens to be much less rewarding for shareholders.

This week brought new evidence of the stresses on the company, when IBM announced that most of the employees in its U.S. hardware division will be asked to take a week off with reduced pay, as it attempts to cut costs.

The forced furloughs highlight IBM's struggle to maintain a double-digit growth pace for its earnings per share despite sales that have actually declined over the past two years. Big Blue has missed Wall Street's revenue expectations more often than not in recent quarters and much of its business is under competitive pressure.

The business model that propelled the company in recent years – one based on cutting costs and selling assets to fund revenue-boosting acquisitions and share buybacks – is becoming more difficult to maintain. Already, the company's cash flow is deteriorating, raising the question of just how good IBM's vaunted earnings growth has been.

"Organically, we believe IBM is effectively in decline," Kulbinder Garcha, an analyst with Credit Suisse Securities, wrote this week in downgrading IBM's shares to "underperform."

To be clear, there are many who look at the tech giant's recent history and believe the company can continue to lead. Analyst Grady Burkett of Morningstar says IBM's combined strengths in computing services, hardware and "enterprise software" for large corporate customers is "unrivalled." And its brand image as a "trusted leader in computing" gives it a significant competitive advantage, says Mr. Burkett, who puts a $208 (U.S.) "fair value" on IBM shares, versus recent trades around $188.

The bulls say that IBM's recent revenue trouble has largely been a product of a lacklustre global economy and cautious customer spending, as well as weakness in its hardware business. Rob Cihra of Evercore Partners, who has an "outperform" rating and $235 target price, believes revenues from IBM's services business should begin to grow again in the second half of 2013, and this "re-acceleration could take IBM's stock with it."

However, the bears see little reason to count on such a re-acceleration. Mr. Garcha of Credit Suisse says IBM is losing market share in four of its top five categories of software.

In recent years, the company has turned to acquisitions of smaller software companies to fuel growth. By Mr. Garcha's reckoning, Big Blue has bought 34 companies since 2010 and paid an average multiple of three times sales for them.

The problem is that the average price-to-sales multiple for small to mid-sized software companies is now 6.7, meaning future acquisitions are likely to be far more costly. At the same time, Mr. Garcha says, IBM has fewer lower-margin businesses to sell off to fund its software buying spree.

Analyst Brian Marshall of International Strategy & Investment Group LLC sees similar issues. He believes nearly all of IBM's growth in operating income over the last decade has come from the company's ability to expand its gross profit margin by shifting out of hardware and into software and services.

But potential acquisitions that could significantly boost IBM's financial picture are now becoming scarce. Even a $1-billion software company with 90-per-cent gross margins would add little to IBM's margins, as Big Blue now books more than $100-billion in sales per year, Mr. Marshall says. An acquisition like that could cost $5-billion to $6-billion, he suggests, and ultimately add just 1 per cent to IBM's earnings per share. (Mr. Marshall has a "cautious" rating on IBM.)

IBM itself sees more robust earnings growth ahead. It still believes it will take its earnings per share, as it calculates them, from around $16 in 2013 to $20 in 2015.

Credit Suisse's Mr. Garcha doesn't doubt IBM's ability to make that target, a number that makes IBM's shares look cheap at just over nine times 2015 profits. He says, however, that investors should look at the company's free cash flow – and that provides an entirely different picture.

Free cash flow is traditionally defined as operating cash flow, minus capital expenditures. It provides an estimate of how much cash a company is generating in excess of the amount required to maintain the business.

In the case of IBM, Mr. Garcha argues free cash flow should be reduced by the company's spending on acquisitions, since they're an essential part of IBM's business model.

Making that adjustment means IBM has one of the largest discrepancies among large tech companies between its free cash flow and its net income, he says. Most of IBM's big tech peers, like Microsoft Corp., Apple Inc. and Xerox Corp., produce a dollar or more of free cash flow for every dollar of net income they report. For IBM, the figure will be more like 60 cents in 2013, he figures.

This also means that while IBM looks cheap on a price-to-earnings basis, it's the most expensive of the large tech companies when its enterprise value – market capitalization, plus net debt – is compared to its free cash flow.

Other analysts echo some of these concerns, adding a few of their own. IBM has traditionally included its restructuring costs as part of its measure of quarterly earnings. Other firms, such as Hewlett-Packard Co., restructure quarter after quarter, yet exclude the expenses on the premise they are "one-time" costs, notes A.M. (Toni) Sacconaghi Jr. of Bernstein Research. "IBM has arguably taken the higher road."

That changed in IBM's most recent earnings report in July, when the company raised its earnings guidance while asking analysts to disregard a second-quarter restructuring charge of 69 cents. Mr. Sacconaghi, who has a "market perform" rating and $225 target price, calls this "a hocus pocus manoeuvre," one of several "red flags" including weak revenue growth, cash-flow conversion, and gains from tax credits.

They "point to a company whose financial targets appear increasingly challenged — a far cry from the easy 'beat and raise' quarters that have characterized IBM over the last decade."

Mr. Sacconaghi calls himself "mixed" on the stock, noting IBM's relatively low P/E multiple. "On the other [hand], earnings quality concerns are increasing and the stock's multiple typically moves with revenue growth, which is likely to remain tepid."

"Tepid" is also a good word to describe IBM's stock performance this year. The shares are down slightly in 2013, compared with a gain in the S&P 500 of nearly 20 per cent. But tepid may be a best-case scenario for the stock going forward, as IBM's underlying issues become clearer.