5 Reasons Why Buffett Might Still Be Holding IBM

Summary

  • Buffett holds IBM at a loss, but why?
  • IBM has a moat, customized offering for cloud, and more.
  • Cloud computing and storage is central to IBM's turnaround.

Investors who held on to IBM's (NYSE:NYSE:IBM) stock after it fell to $120 but then rebounded should consider what to do next. It also helps that Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) is not selling the stock. This prompts the question: what does Buffett see in IBM and why does he still like holding it? The question is more intriguing after Buffett conceded on CNBC to being "the second dumbest guy about the cloud."

IBM

1) Moat

Despite the bulk of its business units not growing in profits, revenue is still sizable, thanks to IBM's moat in holding many Fortune 500 core clients. In the first fiscal quarter of 2016, IBM's revenue was $18.7 billion while net income was $2.3 billion ($2.35 per share). Thanks to its enterprise clients continuing to do business with IBM, revenue grew 17 percent on a constant currency basis. It keeps its moat from eroding by continuing its role in offering critical IT solutions for these businesses. IBM's clients include Wells Fargo (NYSE:WFC) and American Express (NYSE:AXP), both of which Buffett's Berkshire Hathaway has holdings in. Berkshire held $24 billion worth of Wells Fargo, or 10 percent of the company. He owns 16 percent of American Express.

2) Customized offerings

Much how Rackspace (NYSE:RAX) customizes its cloud computing offering to customers, so too does IBM in enterprise cloud-based software sales. Amazon.com (NASDAQ:AMZN) grew market share by continually under-cutting prices of AWS against its competition. This turned cloud computing and storage into a commodity, but also helped Amazon.com sustain its share of the market. When Amazon.com reports quarterly results on April 28 after the market closes, note the AWS revenue growth against the change in profit margin. If profit margin erodes further, Amazon.com will need to reconsider its pricing model. It might consider upselling its AWS the way IBM

This article was written by

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