Although Apple (NASDAQ:AAPL) is one of Berkshire Hathaway’s (NYSE:BRK.A) biggest investments, Warren Buffett is notoriously anti-technology in his portfolio and strategy. He hasn’t historically tended to do especially well when embracing tech holdings. In fact, one of his more notorious tech investments was IBM (NYSE:IBM) in the 2010s.
If you think the Oracle of Omaha never made a mistake, here’s proof that’s even legends stub their toe once in a while.
We explore why Buffett bought this century old technology company in 2011. More importantly – why did Buffett sell IBM in 2018?
When he initially invested, Berkshire Hathaway bought 64 million shares at an average price of $170 per share, for a total value of $10.7 billion of IBM common stock. The short answer as to why he sold it is because he finally saw the value in Apple.
Here’s the story of Buffett and Berkshire’s attempts to invest in technology stocks.
Why Did Buffett Sell IBM?
In November 2011, Buffett appeared on CNBC’s “Squawk Box” to announce the $10.7 billion IBM buy. While the stock eventually reached over $200 in 2013, it spent the rest of the decade on the decline. By the time he sold in May 2018, share prices traded around $145.
Of course, he sold the lion’s share of about 62 million shares in the fourth quarter of 2017, when the stock price was just under $160. This is because IBM wasn’t the only tech stock he sniffed out in the 2010s.
By May 2016, Berkshire Hathaway bought 10 million Apple shares while Buffett was still using an old flip phone and resisting the iPhone revolution. As the firm transitioned out of IBM, it continued to pour money into Apple, with 165.3 million shares by summer 2018.
These companies were once rivals but have since transitioned to serve completely different markets. Apple is known for its innovative consumer electronics ecosystem. IBM is a leader in advancing high technologies for enterprise, like artificial intelligence, quantum computing, blockchain, and more.
And the difference between IBM and Apple was accentuated by the pandemic, which crashed the entire global stock market. Apple recovered to a historic high market cap over $2.2 trillion by year end.
In fact, Apple is Berkshire Hathaway’s third-largest holding, while Berkshire is Apple’s third-largest investor.
Does Buffett Own IBM Now?
Buffett completely divested his IBM shareholding. The initial sale of 94.5 percent of its stake occurred in late 2017, and that money was reinvested into Apple, where it has stayed since. The remaining 2 million shares were sold in the beginning of 2018 and also converted into Apple.
In the time Buffett held IBM, it sank 18 percent, versus the S&P 500 rising 116 percent. This makes it one of Berkshire Hathaway’s worst investments.
IBM is still a massive company that has plenty of resources available. Its revenue streams include cognitive solutions, global business services, technology services and cloud platforms, systems, and global financing.
While it may be on a decline, it’s still one of the most valuable brands in the world. The problem IBM faces is that it’s fighting giants in a highly competitive industry. And it lost shine when upstarts like Zoom (ZM) stole major buzz.
Buffett is also notoriously skittish about buying technology stocks. He mostly shies away from them due to a self-professed lack of understanding.
When he did invest in IBM, it was because the number cruncher bought what he knew. He bought a boring stock like IBM instead of rising tech stocks from the era like PayPal (PYPL), Facebook (FB), and Nvidia (NVDA).
All of these tech investments (and others like them) carried the U.S. economy to record gains. Berkshire thankfully benefited from Apple, but otherwise the firm makes the bulk of its revenue from insurance, wholly-owned businesses like GEICO and shareholdings in companies like Coca Cola.
So, if Buffett lost money on it, is IBM a good investment?
Is IBM A Good Investment?
And it has a lot of blockchain-based competition rising from the Bitcoin boom. This prompted the company to purchase Finnish cloud firm Nordcloud in 2020 before announcing a deal to implement its enterprise solutions for the USDA.
IBM is also a leader in AI and quantum computing, and it has a large cache of data centers and technology at its disposal.
When compared to other tech giants, IBM is a virtual steal. Its P/E ratio is a fraction of what Alphabet, Apple, Amazon, or Microsoft are trading at but so too is its growth rate.
IBM could be an interesting candidate for short sellers or options traders. If the 2020s are anything like the 2010s, this century-old company could find itself acquired by one of its rivals.
Why Did Buffett Sell IBM: The Bottom Line
IBM and Apple are two different tales of Berkshire Hathaway attempts to invest in technology. One drove the firm’s stock to new heights while cementing Buffett’s reputation as a savvy investor and the Oracle of Omaha. The other is IBM.
From 2011 through 2018 when Buffett was a shareholder, IBM’s market capitalization cratered as it lost market share to competitors. Buffett’s own outdated advice could have been a catalyst for this rough decade. The pandemic only accentuated the differences between these companies.
But IBM isn’t out of the fight yet – it has a lot of technology assets to help it fight its larger rivals before it ends up being swallowed by one.
From a valuation perspective it has an upside to $136 per share and earnings going forward look much more positive than they have done in a while. It’s possible the company could surprise the market to the upside which would lead to a resurgence in share price and interest among a broader swath of investors.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.