Why Is Warren Buffett Buying IBM Stock?

  • Warren Buffet is buying heavily into IBM stock.
  • IBM down over 25% from 52-week highs, slowing revenues and profits.
  • IBM is now at excellent prices, a good long-term value pick.
Warren Buffett is buying IBM stock

Legendary investor Warren Buffett recently announced he had purchased more IBM stock last year for Berkshire Hathaway (NYSE:BRK.A) -- and when Warren talks, people listen.  Considered by many to be the greatest investor of all time, any company he purchases gets noticed by investors.

IBM (NYSE:IBM) has had its problems in recent years.  Revenue and earnings have declined steadily in the past 2 years.  Revenue in 2014 fell 8% from 2012; 2014 earnings are off 27% compared to 2012.

The street has punished IBM stock as a result.  IBM stock finished 2013 up slightly for the year. But last October the company missed its earnings forecast and the stock has been falling ever since.  The initial drop was 20% from the 52-week highs of $195/share.  Today (Sep 8, 2015) the stock closed at $147.23, approaching the lowest price seen in 5 years.

One reason mentioned for IBM's poor performance includes stiff competition in cloud services.  A strong growth area for tech companies, IBM has moved too slowly to capture the cloud services market.  Smaller companies like Salesforce (NYSE:CRM) and more nimble competitors like Amazon (NASDAQ:AMZN) have led the way and captured the first fruits of this new market.  Startups are also diving into this hot sector to capture a portion of the profits.

In addition, IBM has seen a slowdown in its other divisions.  Hardware revenue fell by 15% in the third quarter last year.  Software sales have also slowed while making the transition to capture the cloud services market is cutting into profits.  Also, the strong dollar is hurting IBM's revenue in global markets.

With all these negatives about IBM, why is Warren Buffett buying IBM stock?

First, IBM is a large company with plenty of resources and an established base of customers.  Once they do make the transition to cloud services, they have a good chance of capturing their fair share of that market.

Second, IBM has a long history of successfully reinventing itself.  Founded in 1910, IBM has changed from making clocks and punch-cards in the early 1900's, the Norden bombsight in the 1940's for World War II, electric typewriters through the 1980's, hard drives starting in the 1950's, mainframe computers in the 1960's, and pc's in the 1990's.

Third, after this recent sell-off, IBM is now at excellent long-term valuations -- with emphasis on long-term.  The forward P/E ratio is at 9.13 through December 31, 2016, a low figure that will prove to be very low if the company makes a successful transition to the cloud services market.

Remember, Warren Buffett is a value investor; he likes a bargain.  He buys stocks at a deep discount and then waits, if necessary, for years until the market rewards him.  Warren has made a large purchase of IBM stock and now holds millions of shares.  He can afford to wait until the market rewards his insights and he won't get spooked, like many investors do, if the stock price should decline further.

Buying at low prices does not guarantee that the price won't go lower or that it will immediately go up.  But he knows that buying stock at low prices means limited downside risk and excellent long-term potential.

Investors who can afford to hold onto IBM stock for the long-term, even if it drops further, will find IBM an excellent addition to their portfolios.  Betting against Warren Buffet just isn't smart.

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