IBM (NYSE: IBM) has been having a rollercoaster of a month. After seeing its stock price tumble following disappointing first quarter results, it recovered slightly by later announcing a buyback plan. Is this the end of investors' love affair with the tech stock?
Big Blue's Rare Slip
IBM has long been a favorite of investors due to its solid business model, which has been a standard that other Silicon Valley companies are actively trying to copy. The company offers an integrated set of business solutions that encompass services, software and products as its value proposition and offers these solutions to large enterprises that represent its main customer base. IBM's revenues mainly come from services and consulting, which generate high margins for the company but are characterized by low growth.
Big Blue's reliability is why, when its reported earnings failed to meet analysts' expectations, it was such a big event that it not only caused IBM shares to fall but affected the entire Dow Jones Industrial Average as well. IBM reported first quarter earnings of $3 per share, which fell slightly short of the $3.05 estimated by analysts.
The earnings miss was attributed to declining sales for the quarter, which fell 5% to $23.4 billion from the same period last year. The weaker sales were ascribed to a decline in orders from the US government as a result of the sequester action. IBM added that revenues from growth markets such as China, Brazil, Russia and India, fell by one percent.
As a result of the weaker-than-expected earnings report IBM share price fell to $190, an 8% decrease that represented its largest single-day decline since stock prices fell 10% in April 2002. IBM's decline also hurt the broader Dow Jones index, which fell by 0.01% despite the fact that 25 out of the 30 stocks that made up the index recorded gains. IBM reacted to the earnings miss by announcing layoffs in some business areas as well as revealing that it was in advanced talks with Chinese computer company Lenovo (OTCPK:LNVGY) to unload a portion of its computer server business.
Several days later, IBM announced that it would increase its quarterly dividend to $0.95 from the current $0.85 and would also buy back up to $5 billion worth of its stock from investors. It had the expected effect of raising the company's stock prices by some 11.8 percent.
Is IBM a Good Investment?
An encouraging sign for people who want to invest in IBM is the fact that Warren Buffett remains a fan of the stock. His Berkshire Hathaway (BRK.B) actually added to the large positions it already held in IBM despite the fact that its holdings lost some $1.168 billion in value in the wake of IBM's earnings miss. Although it was not reported how much more IBM stock Berkshire Hathaway added to its portfolio, its most recent portfolio filing made at end-December 2012 showed that it held some 68 million IBM shares.
What made Buffett retain his confidence in IBM? Basically, it boils down to his investing philosophy, which involves taking a long-term view of investing. IBM is seen as a company with a competitive advantage in the enterprise business that would allow it to continue reliably making profits in the medium and long-term, in contrast to the Apple (AAPL) business model, which relies on a constant stream of hot new products in its pipeline for it to remain profitable.
IBM remains one of the most iconic and recognizable brands in the world, as well as being one of the most innovative, with more patents to its name than any other company in the world. It has also chosen a business strategy that emphasizes business lines such as services and software, which increase its profitability while sacrificing sales in low margin areas such as hardware. IBM made strategic acquisitions in the last quarter of 2012 that would enable it to take advantage of the increasing shift towards cloud computing as well as the popularity of social media.
The Bottom Line
Now is a good time to add IBM to your investment portfolio since it is currently undervalued and can be bought at a bargain price. IBM is currently trading at $208.44 per share, a far cry from the low of $187.68 it reached on April 19. There's no need to worry about the stock price, since it will eventually go back to its pre-April 19 levels, when share prices reached as high as $215.82, given the strength of the company's fundamentals. IBM is a solid company that will continue to be innovative and generate patents from its groundbreaking research, as well as generating profits for its diversified businesses. Carefully opening a position in your investment portfolio for IBM and then holding on to it will prove richly rewarding, particularly if you are saving up for long-term financial goals such as retirement.