International Business Machines Corp.: This Is Why Warren Buffett Is Bullish on IBM Stock

International Business Machines CorpWarren Buffett “Periodically” Buys IBM Stock

Looking at International Business Machines Corp.’s (NYSE:IBM) second-quarter earnings is like watching an Airbus “380” in mid-turn. The gigantic company is stuck in the middle of a full-scale transition, but Warren Buffett remains bullish on IBM stock.

The company delivered non-GAAP earnings of $2.95 per share on $20.2 billion of revenue. While the earnings did top estimates, they also continued a 19-quarter streak of declining profits. Analysts were unsurprised, however, because IBM has been open about its attempt to transition into new business areas. (Source: “International Business Machines Corp. on the Rise After Earnings (IBM),” InvestorPlace, July 19, 2016.)

“IBM is pioneering new business opportunities beyond the traditional IT marketplace,” IBM Chairman, President and CEO Ginni Rometty said in a statement. “In the second quarter we delivered double-digit revenue growth in our strategic imperatives, driven by innovations in areas such as analytics, security, cloud video services and Watson Health…” (Source: Ibid.)

These strategic imperatives may sound mind-numbingly boring, but they’re actually the key to understanding what’s going on at IBM stock. Since the firm’s core business—of providing IT solutions in person—is losing ground to cloud-based IT solutions, some critics think it’s time to bail on IBM stock. Warren Buffett disagrees with them.

After all, the “Oracle of Omaha” didn’t invest in IBM for its technology. He couldn’t care less about the nuances of who has the hottest tech of the day, because he views those advantages as temporary. He invested $10.0 billion in IBM stock because of the firm’s long-standing relationships with hundreds of companies around the world. (Source: “Buffett: We’ve ‘never sold a share of IBM’ and might buy more,” CNBC, May 2, 2016.)

Those relationships are what make IBM stock valuable—at least according to the greatest investor of the last 100 years. IBM doesn’t have to be the first to transition to a new technology, because it already has a gigantic head start. It can afford to wait for the industry to evolve and develop best practices, then swoop in for the kill.

“We feel fine or we won’t own it. We’ve never sold a share of IBM. Periodically, we buy a little bit more,” Buffett told CNBC’s Squawk Box in an interview this summer. “We have not been an aggressive buyer, but we’ve been a buyer.” (Source: Ibid.)

Would Buffett keep buying IBM stock if it were caught in a permanent decline? I doubt it. He’s the same guy who preaches to investors to “buy on fear,” so he must think that IBM stock is trading at a steep discount.

Considering that the share price is up 17.25% this year, that’s saying something.

Warren Buffett must think there’s still room to the upside because he also said, “I think I can safely say we would be much more likely to buy more in the next 12 or 24 months than we would be to sell shares.” (Source: Ibid; emphasis added.)

Considering that IBM is investing heavily into artificial intelligence, cloud computing, and block chain technology, I have no doubt the company will be able to offer clients services that are up-to-date and competitive. What separates IBM from all the other tech stocks out there are the deep relationships IBM has with other companies, which is what Warren Buffett thinks is so important.

It may take a while for IBM to fully turn its ship around, but I’m confident it will manage it. The company is currently hoping for full-year non-GAAP earnings of $13.50 per share, or $12.23 per share in GAAP earnings. It also has $3.9 billion worth of buybacks left to execute. That gives holders of IBM stock a good reason to sit tight in the meantime.

Really, this is IBM’s game to lose.

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