Amid constant reports of failure, one man still stands behind IBM (NYSE:IBM) and keeps its stock price from tanking - Warren Buffett.
Buffett, who admits he seldom buys technology and does not completely understand it, has refused to abandon the stock as it has fallen over the last two years from a high of near $220/share to the current price of about $155. Reportedly down $1 billion so far he has continued to support it, saying the stock could languish for 5 years, buying itself back cheaply to boost shareholder returns.
It's true that the share counts have been falling, and the dividends have been rising, at Big Blue. Back in his 2012 shareholder letter, he noted that the company had 1.16 billion shares of which he held 5.5%, earning a dividend of 85 cents. Today the share count is down to 990 million and the dividend is up to $1.10. Since writing the letter he has pocketed nearly $10/share in dividends and his stake in the company has gone up.
If IBM made widgets or cupcakes or cigarettes this might be OK. Lots of industries have been taken apart over the years by unscrupulous investors who pocketed enormous profits. But put the dividends since mid-2012, $9.65, against the stock price, down $50/share since then, and I still see a loss.
More important, technology isn't like widgets or cupcakes or cigarettes. A company's reputation matters to technology buyers. Many, many great names have gone completely under once it became clear they were no longer growing - Wang Labs, Silicon Graphics, the list goes on-and-on. The lucky fails, like Sun Microsystems, got taken out by bigger companies, but this provided no benefit to long-term shareholders.
IBM is denying that massive lay-offs are coming under the name "Project Chrome", but reporter Robert Cringely says that's spin. He writes this week that employees are being given phony job performance ratings so managers can fire them, others are being "stuffed" into what's going to Lenovo (OTCPK:LNVGY), early retirement is being pushed hard, and overseas employees are being cut in large numbers. By March 1, there will be far fewer people on the payroll than today, he writes, which should be the bottom line.
Widget companies that do this just continue on as before. Tech companies that do this get a stink about them that leads even long-time customers to consider their options and keeps checkbooks in pockets. Who is going to buy thousands of Apple (NASDAQ:AAPL) iPads from IBM if they're not sure they'll be supported, and if there's not going to be great new IBM gear to attach it to? (Please don't say Watson - that's just a fancy Hadoop front-end.)
IBM bulls insist its falling sales are mainly due to currency issues. While it is true that IBM retains its monopoly in mainframes, such buyers will buy them from Lenovo as quickly as from IBM. Just sell Lenovo the name.
IBM says the new cloud unit under Robert LeBlanc is bringing in $7 billion per year and growing at 60% each year. But that's just 7.5% of total revenue, even at the $92.6 billion figure just reported - sales were $104 billion in just 2012. That's the problem. Every cloud customer IBM gains, is a former software customer who had been paying it more for less.
The company admits it leads in neither Infrastructure as a Service (Amazon.com (NASDAQ:AMZN) leads there) nor Software as a Service (Salesforce.com (NYSE:CRM) leads there). LeBlanc says he has over 1,000 job openings - anyone with big-time skills want them?
Maybe Buffett, who got out in 2011, can eke out a profit as buybacks raise his percentage stake, as dividends throw off cash and as the company is sold off in pieces. (Apple might want the cloud business, for instance.) The question is whether anyone else might turn a profit on this rotting corpse.
The best known brand at Berkshire Hathaway remains its GEICO Gecko. Unless Buffett has gone Gordon Gecko on us, he's the only IBM investor with a hope of a profit here. Except, perhaps, for the shorts.
Disclosure: The author is long AAPL, AMZN.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.