Warren Buffett Believes This Tech Stock is Still a Safe Investment

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 Much of IBM's revenues at the time were tied to its outdated systems, technology and hardware units.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. 

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