Warren Buffett’s mysterious bet on IBM
Since the beginning of 2012, Warren Buffet continuously purchases IBM stock. Berkshire Hathaway owns more than 80 million shares which makes roughly 9% of the portfolio (Feb. 2017). IBM is 4. largest Stock holding of Buffett’s portfolio. And he buys despite the poor performance of the Stock:
IBM share price, source: MarketWatch
But not only stock price:
If a mediocre investor would buy IBM in 2012 he would probably sell the stock with loss and regret his buying decision. Of Course, Warren Buffett can make mistakes too, like other human beings and maybe his investment in IBM is a mistake. But the possibility that he sees something that we don’t see is much higher. Because he usually makes his homework much better.
IBM continuously repurchases own shares:
From Berkshire Hathaway’s shareholder letters (2011/12):
“When Berkshire buys stock in a company that is repurchasing shares, we hope for two events: First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time as well.”
Warren Buffett welcomed the underperformance of IBM stock because the company can repurchase more shares when the price goes down. In the shareholder letter of 2011, he stated that he wouldn’t mind a flat share price over five years:
“I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the five years”
“If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (share repurchasing), you are hurt when stocks rise. You benefit when stocks swoon,”
Stock repurchases are very important for Buffett’s investment decisions:
“Stock repurchases at Coca-Cola and American Express raised our percentage ownership. Our equity in Coca-Cola grew from 8.8 percent to 8.9 percent and our interest at American Express from 13.0 percent to 13.7 percent,”
Shareholder letter of 2012
IBM still boosting its share repurchases. Buffett’s average buying price for IBM is 170 usd and so, with considering dividends, he is slightly in gain.
But, as mentioned above, share repurchases are not the only criteria. The company should increase earnings in long term too which isn’t yet realized by IBM.
“We concluded that the unrealized losses shown in the tables above were temporary. Our conclusions were based on: (a) our ability and intent to hold the securities to recovery; (b) our assessment that the underlying business and financial condition of the issuers was favorable; (c) our opinion that the relative price declines were not significant; and (d) our belief that market prices will increase to and exceed our cost,”
Warren Buffett, about downturn of his portfolio (2016)
He is not dumping IBM shares. So, to his opinion, the underlying business and financial condition of IBM is still favorable.
IBM’s “Strategic Imperatives” Segment:
which includes cloud, Watson and analytics, security, social and mobile technologies.
Because of falling revenue and earnings, IBM is not valued as a growth company. But IBM is in a transition phase and not every segment of the company has poor performance. On the contrary, Strategic Imperatives Segment shows double-digit growth in revenue and makes already 40% of IBM’s business, according to Martin Schroeter, IBM’s chief financial officer.
IBM tries to improve itself beyond traditional IT and being no more a company of software and hardware.
“Our ability to apply deep expertise and breakthrough technology, led by Watson and the IBM Cloud, to massive amounts of data is enabling us to build new markets and transform industries. Whether it is banks implementing IBM blockchain solutions, hospitals leveraging Watson to fight cancer, or retailers using cognitive apps built on the IBM Cloud to transform the customer experience, clients across all industries are tapping into a new kind of innovation value from IBM.”
Ginni Rometty, IBM chairman, president and CEO
The main strategy of IBM is:
- integrating its Cognitive Solutions (Artificial Intelligence) with Cloud Platform,
- making businesses more efficient by digitalizing and improving them through cloud technology
- gathering huge amounts of Data from businesses and personal engagements which is, according to the Company, a very important competitive advantage
The outcome of Buffett’s bet depends on:
How long can the strategic imperatives business continue to grow in double digits?
And the competitors, like Oracle, don’t sleep.
“I think IBM will be worth more money but, like I said, I could be wrong but we’ll accept that.”
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