Berkshire Hathaway’s CEO, Warren Buffett, told CNBC that he sold around a third of his holding in International Business Machines (IBM) Corp earlier this year when the price per share was over $180.
IBM’s share price slid -2.51% to $155.05 at market close. Berkshire held 81 million of IBM’s shares (8.6% stake) making it the technology company’s largest shareholder.
Competition in a cloud
It now holds around 57 million shares and Buffett, according to CNBC news network, “revalued [IBM] somewhat downward” because of strong competition.
IBM has been shifting focus from its core traditional businesses to new strategic imperatives. IBM’s CFO, Martin Schroeter, said in the earnings call in March: “We have focused on building a cognitive and cloud platform…while maintaining our focus on delivering higher value solutions. As part of the transformation, we have made significant investments and shifted resources.”
Market analysts view IBM’s competitors Amazon.com’s Amazon Web Services and Microsoft Corp’s Azure in cloud computing where both companies have a large presence. It also butts up against Google’s artificial intelligence division, Alphabet Inc.
There was no further explanation given for Buffett’s choice to unload a third of his shares and Berkshire Hathaway did not respond to requests for an interview.
However, Buffett historically didn’t buy technology stocks because he famously says he does not buy shares in companies he does not understand.
His investment in to IBM around six years ago therefore came as a surprise. At the time he said the tech giant fit well within his portfolio with what he saw as “stickiness” with its customer base.
Berkshire’s sloughing off of shares adds to a calamitous start of the year for the Big Blue tech company after it reported first quarter earnings showing that revenue fell for 20 consecutive quarters. It reported a drop of 13% in quarterly earnings.
No where to go but up?
IBM’s poor showing was down to revenue streams drying up from its more traditional lines of business selling hardware, software and IT-solutions for businesses.
However, analysts remain upbeat about its prospects particularly in terms of big data-analytics and the new cloud culture which the company has invested in along with analytics and security.
Morgan Stanley released a report in March on cloud computing evaluating IBM and other major players.
The report said: “We recognize that IBM's non-cloud revenues include declining legacy businesses but expect declines to stabilize as the pool of core, non- cloud revenues becomes a smaller segment.”
Further, Morgan Stanley concluded that IBM had the most upside potential saying that its $3bn public cloud business would grow by 33% from 2016-2020.
In its Q1 2017 results cloud services was growing rapidly and accounted for $14.6bn in revenue for the company.