What You Need To Know About International Business Machines Corp. (IBM) Before Buying [Or Selling]

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International Business Machines Corp. (NYSE:IBM) is in trouble.  Will it rebound, or is this the beginning (or middle) of the end?

The stock is down nearly 20% in the last month.

IBM Price

Source:  Google Finance

Nonetheless, IBM remains a fairly popular stock among elite investors, including arguably the most elite investor of all, Warren Buffett. Buffett’s Berkshire Hathaway owns over 79.56 million shares of IBM worth over $12.94 billion. 58 other investors in our database were also long IBM on June 30, with the total being up by six from March 31. However, the value of the stakes held by the other 58 investors totaled less than $1.88 billion and would have left them collectively underweight IBM without Buffett’s gigantic position. All told, they held 9.30% of the company’s stock on June 30.

Here’s a startling fact about IBM – the company’s revenues were higher in 2007 than they are now. This sounds bad, but profits tell a different story.

IBM’s yearly profits are shown in the image below:

IBM Profits per Year

Profits have steadily marched upwards since 2005 before slight declines in 2013 and 2014.  IBM’s revenues have fallen, but profits have trended upwards over the last decade.

IBM:  Feast or Famine

IBM is currently trading for a price-to-earnings ratio of 9.6.  The stock is dirt cheap right now.  It also offers investors a strong 3.7% dividend yield.

If IBM manages to ‘fix’ its operations and return to steady growth then the company is an absolute bargain at current prices.

If the worry surrounding IBM were to lift, the stock could easily trade for a price-to-earnings ratio at 15 or 20.  This would create enormous stock price appreciation gains for shareholders.

On the other hand, IBM is vastly overvalued right now if you believe the company is in a slow (or not so slow) decline.  If that’s the case, then IBM is a value trap – and not worth owning at all.

There isn’t much of a middle ground with IBM.  It either returns to growth, or it continues its slow decline.

Warren Buffett Has Given His Opinion

Warren Buffett currently has nearly $13 billion invested in IBM.  IBM is his 3rd largest holding, behind only Coca-Cola (KO) and Wells Fargo (WFC).

Warren Buffett fist invested in IBM in 2011.  He has continued to add to his position this year.  Buffett’s IBM investment is interesting as he has famously avoided the technology sector.

When asked in the late 1990’s if he was (at the time) investing in technology stocks, Warren Buffett said the following:

“The answer is no, and it’s probably unfortunate. I don’t know what that world will look like in 10 years, and I don’t want to play in a game where the other guy has an advantage over me.”

Warren Buffett has also said that he ‘doesn’t understand’ technology.  It’s difficult to take this statement at face value.  Buffett is well known for his excellent investing quotes and easy-to-understand investment philosophy.

It is often lost on people just how smart Warren Buffett is.  He is said to possess a photographic memory and be extremely adept at mental calculations.  If Buffett can’t ‘get’ technology – then I think that’s more telling of the industry than of Buffett’s intellect.

I believe Buffett doesn’t invest in the technology industry because it changes rapidly.  Rapid change makes it virtually impossible to sustain a strong competitive advantage for a long period of time.  Very few companies have been able to – perhaps Microsoft (MSFT) and IBM are the best examples.

For Buffett to continue to invest in International Business Machines Corp. (NYSE:IBM) , he must see it has different somehow than most other technology stocks – he sees it as possessing a durable competitive advantage.  If he didn’t, he wouldn’t put so much of his wealth into the stock.

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