Tech-Shy Warren Buffet Places Big $10.7B USD Bet on IBM

IT Tech-Shy Warren Buffet Places Big $10.7B USD Bet on IBM
Jason Mick (Blog) - November 14, 2011 6:03 PM
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10 comment(s) - last by idiot77.. on Nov 15 at 2:13 AM
Megainvestor is known for avoid tech companies, but big blue's diverse business has won him over

Warren Buffett, 81, built his billions in fortune on a principle of only investing in firms he believed would sustain a same strong business model for 15 to 20 years into the future. As you might guess, this means that Buffet is a notorious detractor on tech ventures -- particularly the internet startup.

I. Buffett Considers IBM a Safe Pic

In a 1998 talk he famously remarked, "I look for businesses in which I think I can predict what they’re going to look like in ten or 15 or 20 years… Take Wrigley’s chewing gum. I don’t think the Internet is going to change how people are going to chew gum… I don’t think it will change whether people shave or how they shave."

But it looks like the world's third richest man has finally picked a horse in the technology stock race -- and no, it's not Apple, Inc. (AAPL). Mr. Buffett eschewed the fruity giant that's had its share of ups and downs for a far older firm -- International Business Machines, Inc. (IBM).

Currently in its 100th year, the information technology, cloud computing, hardware, and software giant now counts Mr. Buffett as perhaps its biggest investor. Mr. Buffett has sunk over a sixth of his Berkshire Hathaway, Inc. (BRK.A) fortune into IBM. His $10.7B dive is worth a 5.4 percent stake.

Warren Buffett blue
Warren Buffett is seeing blue -- Big Blue that is. [Image Source: Mustafa Quraishi/AP/File]

He commented during an interview on CNBC's SquawkBox, "It’s a company that helps IT departments do their job better. It is a big deal for a big company to change auditors, change law firms."

II. Examining the Heavyweights of the Tech Sector

Despite the interesting play, Berkshire Hathaway shares joined the market at large in a meander downwards on European fears. IBM, though, bucked the market trend, holding almost steady at close.

IBM has risen 29 percent in market capitalization over the year to rest just behind Apple at the top of the U.S. technology market. That makes it more valuable than Microsoft Corp. (MSFT), a firm whose operating system drives over a billion personal computers.

Apple made a net profit of $6.62B USD in its third calendar quarter of 2011 [source]. IBM quietly posted a $3.8B USD profit (GAAP) haul in its own recent results [source]. While IBM's profit may sound smaller, it doesn't have to rely upon the fickle consumer market as much as Apple, instead targeting primarily the business sector.

Microsoft still posts bigger profits than IBM -- it hauled in $5.74B USD in profit in its latest quarter [source]. But it's ever the subject of pessimism over whether it can maintain its dominant position amid what some say is a creative vacuum. Microsoft gets little love from investors, least of all Mr. Buffett.

On the other hand, IBM is outperforming a perennial market darling who dominates web search, web advertising, and the smartphone markets -- Google, Inc. (GOOG). Google pulled in a modest $2.73B in its latest quarter [source].

IBM is currently in the midst of a leadership change, with Samuel J. Palmisano -- the CEO for the last nine years -- stepping down and being replaced by Virginia "Ginni" Rometty. Prior to her new role, Ms. Rometty served as IBM's Senior Vice President and Group Executive for Sales, Marketing, and Strategy. She will be IBM's first female CEO in the company's century-long history.

Ginni Rometty
Ginni Rometty will be leading IBM into its next century as the company's first woman CEO. Unlike many past IBM CEOs, she comes from a non-technical background.
[Source: Journalist Independent]

The company is a bit of a puzzle for casual observers to wrap their heads around given its multitude of seemingly disparate ventures and futurist projects. But the company gained a great deal of attention earlier this year for its Watson supercomputer, which used its powerful AI and massive knowledgebase to crush mankind's most successful Jeopardy champions in a charity game.

Source: WSJ

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[Collapse Comment] NEW! Government funded Software as a Service
By Shig on 11/14/2011 6:54:14 PM , Rating: 2
IBM outsources their RnD expenses to other tech companies and governments for chip production, hires bright young minds to develop software at minimal cost, then packages it back to large tech companies and governments. Amazing business model.

The Power7 chip was funded by a 244$ million DARPA contract. Sony and Toshiba funded a large portion for the Cell processor, then IBM built roadrunner using it with other commodity processors (first petascale supercomputer) and off the shelf gear. The Watson supercomputer (the one that won jeopardy) was built upon the power7 architecture, a huge amount of ram for its size, and some ingenious algorithms. Watson's tech is now going to one of the most profitable sectors of the economy, medical services.

IBM also has enormous contracts with major cities across the globe including Seoul, New York City, and Rio de Janeiro. They save municipalities millions a year by installing their software as a service to manage lighting, water, and electricity.

This investment marks an inflection point where making the actual hardware itself is no longer profitable enough. Intel and Samsung would be the exception here, but they're essentially monopolies and the last two big companies to control major Fab resources.

Apple vs. Foxconn (the people who actually make the i-gadgets at slave labor wages) is the best example I can think of that exemplifies this. Apple employs 50,000 people while Foxconn employs close to a million people. Apple's stock trades at 379.36$ a share, Foxconn trades at 2.72$ a share. Apple being the consumer side software as a service, while IBM is the government side.

[Collapse Comment] NEW! RE: Government funded Software as a Service
By Zoomer on 11/14/2011 8:07:17 PM , Rating: 2
Welcome to vertical integration. And don't kid yourself, Sony and Toshiba, not to mention AMD/GF, won't partner with IBM if there weren't benefits to them.

$244M to develop the chip? That's not covering it. The IBM z/196 system cost $1.5B - Billion - to develop.

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[Collapse Comment] NEW! RE: Government funded Software as a Service
By Ammohunt on 11/14/2011 8:57:24 PM , Rating: 2
too bad they are the worst employers! I have had the misfortune of working for them twice. IBMers as they call themselves are next to near worthless for technical purposes outside of IBM. I will never willingly work for them again.

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[Collapse Comment] NEW! RE: Government funded Software as a Service
By TakinYourPoints on 11/15/2011 1:43:52 AM , Rating: 2
Heard the same from my friend who quit there last year, it's too bad. My friends at Microsoft and Google are quite happy though. Smile

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[Collapse Comment] NEW! RE: Government funded Software as a Service
By nocturne_81 on 11/14/2011 9:30:16 PM , Rating: 2
Exactly.. Apple stock may get much more attention (for the moment), but doesn't really compare at all to 'real' tech companies like IBM, HP, Intel, and MSFT (as well as Google to an extent) -- but if the world is still here in another century (even in a post-apocalyptic wasteland), IBM certainly will be too.

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[Collapse Comment] NEW! RE: Government funded Software as a Service
By Samus on 11/15/2011 12:21:18 AM , Rating: 2
"In 2010, IBM employed 105,000 workers in the U.S., a drop of 30,000 since 2003, and 75,000 people in India, up from 9,000 seven years previous."

That right there shows where the talent is. We [USA] are failing.

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[Collapse Comment] NEW! RE: Government funded Software as a Service
By Spookster on 11/15/2011 1:59:28 AM , Rating: 2
I would not confuse large amounts of outsourcing to India with being where they are finding talent. They [India] work for a third of what engineers here in the US make. But as they say you get what you pay for. My company also is outsourcing to India and it now costs us more to develop software because we have to fix everything they work on after they send it back.

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[Collapse Comment] NEW! RE: Government funded Software as a Service
By TakinYourPoints on 11/15/2011 1:38:24 AM , Rating: 2
AAPL is actually lowly valued by their PEG ratio compared to many other techs. The stock does well compared to the others you mentioned simply because they make more gross revenue and net profit, even with much lower profit margins than companies like MSFT and Oracle.

As for IBM, it has a lot of things going for it. They sold their low margin hardware business to Lenovo and moved into services. They briefly exceeded Microsoft's market cap and there is only about a 1% difference between the two. IBM has grown a lot in the last three years and on top of everything they pay a dividend.

It bears repeating: even if IBM is flat from here, the company pays out a dividend. A stable stock with good management and a healthy dividend are classic criteria for Buffet. It's no wonder this is one of the few techs he's put such a significant stake into. I'm surprised he picked a stock that looks like a "high flier", the chart has gone parabolic since 2008, but given his long term interest it shouldn't mean much in the long run.

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[Collapse Comment] NEW! RE: Government funded Software as a Service
By idiot77 on 11/15/2011 2:13:39 AM , Rating: 2
Their revenue means almost nothing. Apple doesn't pay out dividends. Their stock holders are just buying hoping someone pays more for their stock than they did.

If they start losing money, their stock will tank very hard since the entire value of the company is in cash and their investments in other companies..
.
Grant it, that's a lot of cash, but still. No dividends makes it pretty crappy stock to buy heavily in if you ask me (for long term).

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[Collapse Comment] NEW! Another reason for not picking AAPL
By Solandri on 11/14/2011 9:19:16 PM , Rating: 2
Buffet is a big believer in traditional investing. Pick a stock and stay with it for the long haul. Rely on strong dividends from consistent economic performance over many years or decades to generate a return, don't rely on rising stock price as your return.

Apple doesn't pay dividends.

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