Why Warren Buffett buys IBM
This is a good write up on why Warren Buffett buys IBM despite it being a tech stock which Buffett always says that he doesn’t understand tech stocks due to their substainability problem.
However, IBM is no ordinary tech stock, it is growing business in emerging markets and it has “sticky” customers thus ensuring constant cash flow. It also doesn’t spend much on capital expenditure and has a business model that is hard to replicate by competitors.
“They also noted IBM’s particular strengths, including its market-driven approach, its established presence in BRIC countries and its innovative focus on business solutions — a strategy that “is sound and hard to copy,” according to Wharton marketing professor George S. Day.
Overall, it is difficult “for a company like Berkshire Hathaway not to have exposure to the technology sector, given the sector’s importance to the economy,” notes Wharton management professor David Hsu. “I think Buffett probably evaluated several possibilities in the technology domain before selecting IBM.”
According to Hsu, “IBM has been well managed, and has done an admirable job remaking itself and shifting to the service space. Its timely divestiture of computer hardware — as compared to HP, for example — is especially notable.”
Simultaneously, Hsu adds, for quite some time IBM has been one of the “world-wide innovation leaders, as measured by patent grants, and investors in R&D, as compared to Dell, for example. The end result is that IBM is valued more now than it has ever been. Clearly, Buffett sees more upside in the coming years for IBM.”
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