IBM Stock: Why Warren Buffett Is Bullish on International Business Machines Corp.
Don’t Ignore IBM Stock
International Business Machines Corp. (NYSE:IBM) didn’t fare well in the wake of the Brexit vote. In a matter of hours, IBM stock plunged from $156.00 to $146.00 per share. IBM stock has gathered some steam since then, rising on the post-Brexit rally, yet to judge IBM on the last few days of trading would be a colossal mistake.
Let me explain…
Up until the Brexit vote, IBM stock had actually gained well over 12% after years of uninspired performance. But IBM stock has shown nothing short of a revival since February of this year, gaining some 16% in a month. In this case, investors might want to consider the Brexit as a bonanza, rather than a risk.
Simply put: while IBM stock has dropped five or so percentage points following the Brexit outcome, the loss had nothing whatsoever to do with IBM. The company was performing just fine and if British voters had voted to stay in the EU, the stock likely would have gained.
The good news for those who have been sitting on the fence on IBM stock is that it’s now sitting at a discounted price. We’re not talking about the fancy calculation kind of discount, though. In this case, it’s rather more sensible. IBM dropped five percent on Brexit fears alone. By buying it now, you can expect to gain at least five percent as IBM stock bounces back from the Brexit shock.
One of the reasons for IBM’s earlier rally—but not the only reason or even the most important one—is that Warren Buffett, through his Berkshire Hathaway fund, has expressed confidence in IBM. (Source: “Warren Buffett: Buying IBM a mistake? Don’t think so, but…,” CNBC, February 29, 2016.)
Around the end of 2015, it was revealed that Berkshire increased its position in IBM last year. Far from concerned, Buffett said that sooner or later, IBM stock will experience a major rally.
Simply put, there exist stocks that appear to be on a one-way street to a crash. For many investors, IBM, once a symbol of high tech and American organizational know-how, has earned this reputation—rather unfairly.
True, IBM stock has suffered a long decline. The bearish explanation for this phenomenon goes like this: sales of PCs are declining in favor of mobile devices and that market has become saturated, leaving IBM outside the proverbial boat and unable to recover.
That feeling has grown all the more, considering the downward trend has lasted for well over two years now. But it is hard to dismiss IBM, particularly as it is still on the leading edge of technology and innovation—just not in PCs or mobile devices.
One of the main ways in which IBM expects to maintain its technological edge along with IBM stock’s value is cloud computing. IBM has played an important role in developing the cloud. Now, the company is planning an aggressive acquisition strategy to secure leadership through such companies as Bluewolf Group LLC and SoftLayer Technologies—which IBM took over in 2013. In the process, IBM announced the formation of a new division called “Cloud Services,” which will offer a wide range of products in partnership with software vendors and technology specialists.
As demand for cloud solutions increases—and so far, there appears to be no limit to growth—IBM has bolstered its cloud potential to the point that it’s a major part of the company’s business. Nevertheless, interested investors should also consider the fact that IBM is also working on artificial intelligence (AI) and deep-learning services through its “Watson” unit. (Source: “IBM Moves To Bolster Enterprise Cloud Offerings,” NewsFactor, June 24, 2016.)
International Business Machines Corp. simply remains an excellent example of a well-run company—even in the eyes of Warren Buffett. Having said that, IBM stock is a good example of a long-term pick. It’s not a pump-and-dump kind of stock.
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