CEO Warren Buffett of Berkshire Hathaway Inc. (NYSE:BRK.B) has sold off one-third of his stake in International Business Machines Corp. (NYSE:IBM) during the first quarter. And that news sent IBM stock down 3% in Friday’s early trade.
But don’t feel sorry for Buffett. Feel sorry for IBM, IBM stock holders and the company’s employees.
Buffett, who previously said he avoided technology stocks because he didn’t understand them, first bought IBM shares in 2011, when they were trading at about $170. Assuming he sold part of the stake in February or March, he could have gotten as much as $180 per share. Then there were six years of dividends, well over $20 in total, for him to account for.
The point is that Warren Buffett timed his IBM investment well, and it has delivered for him. Most IBM stock holders have not been so lucky, considering shares have basically been flat while the S&P 500 has risen 80% since 2011.
Cloud Rained on IBM’s Parade
What Buffett did not understand when he bought into IBM was just how cloud would rain on IBM’s parade.
IBM saw cloud coming. It reacted by buying SoftLayer, then a major cloud infrastructure player, for $2 billion in 2013.
Its mistake, described in the company’s own marketing materials at the time, was in seeing cloud as self-sustaining, as a “glue” between public clouds like Amazon.com, Inc. (NASDAQ:AMZN), which were already delivering superior price-performance, and “private clouds,” built on data center equipment IBM would sell to its corporate customers.
That is not how the game played out. To be a cloud player required early, sustained commitments of capital, $1 billion each quarter to start, for networks of high-capacity cloud data centers. Instead of investing this capital, IBM handed it back to shareholders like Buffett.
What happened is that companies began, after some experimenting, moving production-level workloads to the public cloud and closing their own data centers, moving equipment into cloud-ready datacenter REITs that were not big IBM customers. IBM’s revenue from once-profitable product lines began cratering, and cloud revenue couldn’t catch up.
In reducing his stake, Warren Buffett talked about “three big competitors,” by which he presumably meant Amazon, Alphabet Inc (NASDAQ:GOOGL) and Microsoft Corporation (NASDAQ:MSFT).
Those three companies together now have more than 10 times IBM’s market cap, at $1.625 trillion.
What’s Left for IBM Stock?
The cloud game is over, and IBM lost. Its vaunted Watson software system is a niche product, a nice front-end for getting questions answered through clouds, but nothing more.
IBM stock no longer has the size to even compete in this space. Its market cap is under $150 billion, making it a minnow next to the cloud giants. It is even smaller than Oracle Corporation (NYSE:ORCL), which is valued at $190 billion.
A merger between Oracle and IBM might let its experts at lock-in get out their investment. Microsoft might want it for the customers, and Google might take it for the technology.
But technology is a grow-or-die game. Once you lose your place in the “great game,” on the leading edge of the space, you don’t get back in. It’s like my old alma mater, Rice University, which lost its place as part of a “big-time” football conference 20 years ago and now has no hope of making money at the game ever again.
IBM’s moat of mainframes continues to dry up, its sales slowly declining year upon year. There soon will not be enough profit to sustain the dividend, and the company is going to have to put itself up for sale.
Former IBM CEO Lou Gerstner rebuilt the company on “software and services” almost a quarter-century ago, with services as something people could do, something people would sell. That’s no longer the case. In the cloud era, services are what algorithms do, and it’s mostly self-service.
IBM is lost in this century. Warren Buffett was right. He didn’t understand technology.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in GOOGL, AMZN and MSFT.
