IBM falls as Buffett reports reduced stake

Bloomberg

Warren Buffett is acknowledging what many investors have already realized: IBM’s long-promised reinvention is slow, painful and nowhere near close to the end.
In an interview with CNBC, the billionaire chairman and chief executive officer of Berkshire Hathaway Inc. disclosed that he sold about a third of the firm’s investment in the computer-services giant during the first half of this year. Before the sales, Berkshire held about 81 million shares. The news led IBM to tumble as much as 3.8 percent to $153.00 in New York, its lowest intraday price since November.
IBM has been frustrating investors for years, reporting in April its 20th straight quarterly revenue decline. The company once synonymous with mainframe innovations has been slow to adopt cloud-related technologies and has had to play catch-up to the likes of Amazon.com Inc. in offering computing and other software and services over the Internet.
“I don’t value IBM the same way that I did six years ago when I started buying,” Buffett told CNBC. “I’ve revalued it somewhat downward.” Buffett said that in looking back at how IBM thought their business would develop, “what they’ve run into is some pretty tough competitors.”
He may have been thinking about Amazon Web Services, said UBS Group AG analyst Steve Milunovich. Amazon’s cloud computing commands about 45 percent of the market for infrastructure as a service where companies buy basic computing and storage power from the cloud.
“Buffett often has praised Jeff Bezos,” Amazon’s CEO, Milunovich wrote in a note Friday. “Even though IBM positions hybrid cloud as a destination rather than a transition, AWS threatens Big Blue’s on-premise computing dominance.”

INITIAL INTEREST
Berkshire started building its International Business Machines Corp. stake in 2011, and eventually became the company’s largest shareholder, with an investment valued at almost $13 billion. With his initial interest, Buffett was betting on IBM’s expertise in information technology services to drive growth in emerging markets.
At the time, then Chief Executive Officer Sam Palmisano, was steering Big Blue toward services and software and away from hardware. To achieve that, he’d been making aggressive stock buybacks, spending more than $15 billion annually on repurchases during his last two years at the company. IBM abandoned that goal in 2014 under CEO Ginni Rometty, sending shares spiraling.
Rometty, who took over in 2012, has slowed the pace of share buybacks in recent years, spending instead on acquisitions to bolster growth areas. While IBM is working to become a cloud purveyor, its new services and software haven’t been growing fast enough to counter the slowdown in some of its major business lines, such as traditional information-technology services, which have been declining quickly. After a run of three straight annual declines, IBM’s shares gained about 21 percent in 2016 but are still more than 25 percent lower than the company’s 10-year peak in 2013. The shares have lagged behind technology peers and the S&P 500 Index in 2017.

BUFFETT BUFFER
Without the Buffett buffer, IBM may receive more scrutiny around when they’ll reach that inflection point. “This may put some pressure on management to be more aggressive in returning to growth,” Anurag Rana, a Bloomberg Intelligence analyst, said in an email. Other investors “may get impatient.”
Thousands of Berkshire investors will gather in Omaha, Nebraska, for Berkshire’s annual meeting on Saturday. Buffett, 86, and Vice Chairman Charles Munger, who regularly field questions from shareholders at the event, can expect to be quizzed about IBM — as they have been in the past. Representatives of Berkshire and IBM didn’t respond to requests for comment.
While Buffett is known for sticking with stocks like Coca-Cola Co. for decades, he’s not wedded to old favorites when circumstances change. In recent years, he got rid of most of Berkshire’s stock in Procter & Gamble Co. and Wal-Mart Stores Inc. He cited the competition facing Wal-Mart from online rivals like Amazon.com Inc., while pointing in 2012 to disappointing results at P&G.