Warren Buffett Believes This Tech Stock is Still a Safe Investment

For years Big Blue was considered the bluest of blue chip stocks, but its recent stock price performance has been anything but stellar.

May 27, 2014 at 4:10PM

When investors think of a (relatively) safe tech stock, the name is generally well-known to even a casual observer as a leader in its industry, with solid, if not spectacular, long-term investment performance. Of course, every company at one time or another has its ups and downs, and IBM (NYSE:IBM) is no exception. The early 1990's were just such a time for Big Blue and the company has, again, fallen on hard times more recently. 

But does that mean IBM is no longer a safe, long-term investment? Patience may be rewarded. At least Warren Buffett believes so and Berkshire Hathaway increased its IBM stake by 0.3% in the first quarter of 2014.

Some Background
The beginning of 1991 saw IBM's stock price hovering around the $140 per share range -- it was the undisputed global leader in the technology industry, and king of the blue chips. By 1993, IBM had laid off about 100,000 employees around the world, and its stock was trading around $50 a share. Though the economy at the time didn't help, a rapidly changing market combined with a slow response to those changes hit IBM hard. That probably sounds all-too-familiar to today's IBM followers.

First, the bad news
When CEO Ginni Rometty took the reins in Jan. of 2012, IBM was much like it was in the early 1990's: entrenched in a fading industry and unwilling, or unable, to adapt. Much of IBM's revenues at the time were tied to its outdated systems, technology and hardware units. With the decline in the PC market combined with the transition to Software-as-a-Service (SaaS), cloud and related technologies, IBM found itself the odd man out.

And IBM is by no means the only example of a long-time tech industry giant that was slow to react to a changing marketplace. Any Microsoft (NASDAQ:MSFT) shareholder can attest to that. In the case of former CEO Steve Ballmer and Microsoft, its snail-like transition to becoming a major player in burgeoning technologies like mobile and cloud services left it with a lot in common with Rometty and team.

For IBM, just as with Microsoft, its transformation efforts are hardly complete, and recent earnings reports speak to the difficulties each has had instituting wholesale changes. IBM's lower revenue and net income in its recently completed Q1 compared to 2013 took no one by surprise. Microsoft didn't fare much better, announcing fiscal 2014 Q3 revenues nearly identical to those of the year-ago period.

Despite the similarities and challenges faced by each, from a stock price perspective, IBM's performance the past year pales in comparison to Microsoft's. While hardly awe-inspiring, Microsoft shareholders have enjoyed a nearly 17% jump the past 12 months. IBM's share price? Down over 10% during that same time.

The new IBM
Yes, the declining PC market continues to pressure IBM's stock price, but that's going to change. Somewhat lost in its most recent earnings report were signs that the "continuous transformation," as Rometty calls it, is beginning to take hold. Of IBM's $99.8 billion in total revenue last year, $4.4 billion came from cloud-related sales. That's nearly 70% better than in the prior year, and a huge step in the right direction. Software and services revenues also improved, and reinforce IBM's shift away from old-school hardware.

And let's not forget that we're in a growth phase of big data, and IBM is well-positioned to take advantage of what is expected to be a significant market. The recent $1 billion investment to drive revenues from IBM's super-computer Watson speaks to its focus on both big data and cloud services. The cognitive computer can actually learn, and the possibilities that Watson offers in the fast-growing big data market are seemingly endless.

Final Foolish thoughts
For those of us who have been around a while, we've seen this IBM movie before. The state of IBM today isn't nearly as bad as it was 20 years ago, but many of the reasons behind its sluggish performance of late are eerily similar. And today, just like then, IBM offers mid and long-term investors significant growth potential, as any sound investment should. 

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock… and join Buffett in his quest for a veritable landslide of profits!

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway, International Business Machines, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers