When Warren Buffett surprised markets in 2011 after announcing that he had started building up a stake in IBM - a member of the tech sector from which Buffett had traditionally kept a safe distance - we joked that the only reason for his involvement was IBM's then unprecedented buyback spree. A few short years later, IBM's buybacks ended with a whimper when its debt level hit record highs (the company's credit rating was recently downgraded) even as its revenues continued to post a record slide and were back to levels seen at the start of the Millennium, while EPS only beat thanks to ever lower effective tax rates.
Which is why we were not surprised to learn overnight that Buffett's Berkshire had dumped a third of its stake in IBM in the first explicit sign of declining confidence by the famed investor.
Speaking with CNBC, Buffett said he had sold the substantial holding, worth more than $4bn at the current share price, after "revising his view of the company’s competitive prospects."
“I don’t value IBM the same way that I did six years ago when I started buying . . . I’ve revalued it somewhat downward,” he said. “IBM is a big strong company, but they’ve got big strong competitors too.”
"I think if you look back at what they were projecting and how they thought the business would develop I would say what they’ve run into is some pretty tough competitors,” Mr Buffett added,
Buffett bought in at an average price of about $170 per share, and when the shares briefly traded above $180 earlier this year “we actually sold a reasonable amount of stock”, he said to CNBC.
Back in 2011, when Berkshire first announced a stake in IBM, it was seen as a vote of confidence in the company’s ability to ride out the sort of disruptive changes in tech markets that had led Mr Buffett to avoid taking big positions in the industry in the past. However, as documented here each and every quarter since, IBM’s fortunes turned two years later as the rise of cloud computing ate into demand for its IT equipment and services, which are heavily geared towards companies that install and run their own IT facilities. IBM was eventually forced to abandon the ambitious five-year financial targets that it had used to "demonstrate its resilience" in the face of tech change.
And yet, despite quarter after quarter of declining revenue and profit, Buffett continued to add to his stake, buying more shares in late 2015 when the price was higher than today. He eventually amassed a position of 81 million shares, or 8.5% of the stock according to FT. According to Berkshire’s most recent annual report, the value of its IBM stake stood at $13.5 billion at the end of last year.
It was the only one of the company’s 15 largest investments where Buffett was sitting on a loss. Some more from the FT:
Although Mr Buffett did not identify the rivals who had made him rethink his investment in IBM, the company has struggled to match the new wave of cloud competitors, led by Amazon, and including Microsoft and Google.
Ginni Rometty, who became IBM’s chief executive less than two months after Mr Buffett first became a shareholder, has made cloud computing one of the company’s top priorities, along with artificial intelligence and data analytics.
But growth in these new businesses has not been enough to outweigh the continuing shrinkage of IBM’s core business, leading earlier this year to the 20th successive quarter of annual revenue declines. The shrinkage has also reflected the disposals of some lower-margin operations as IBM has tried to reposition its business in more promising markets.
While Buffett had avoided passing judgment on IBM until now, market enthusiasm for IBM has been cooling for some time. At Berkshire’s annual meeting last year, he gave a notably underwhelming defence of the investment when challenged by a shareholder about IBM’s prospects. He said then that the company had “certain strengths and certain weaknesses”.
IBM stock was down over 3% in the premarket on news of Buffett's partial capitulation.