IBM - International Business Machines

[Picasso]

Good points kevin.  Not going to argue with facts :)

[scorpioncapital]

If you read Hagstrom's The Warren Buffett way 3rd Edition, there's a section on iBM - https://books.google.ca/books?id=lXnxAAAAQBAJ&pg=PT116&lpg=PT116&dq=ibm+shares+outstanding+1992&source=bl&ots=Y3RYmHgzyH&sig=pBhv5KByaiIxeDsONHOjAZxOGGM&hl=en&sa=X&ved=0CDEQ6AEwBGoVChMIzumapZ-HyQIVTqKICh3utQa2#v=onepage&q=ibm%20shares%20outstanding%201992&f=false

 

It says it hit Buffett 'right between the eyes' that IBM's competitive advantage is its salesforce and finding and keeping clients. That's the moat, not the technology. This makes sense. That's the premise of investment. Makes sense too as Buffett isn't very good at predicting cash flows from tech companies.

 

But I will agree Amazon is a big threat if they have a good sales force and are able to take business away from IBM's clients. But in the end, it's a battle for IT spending.

 

But does anyone understand why IBM's salesforce is so much better than any of the other companies in a commodity oriented business? I am inclined to agree somewhat because in 1993 when IBM almost went belly up, Gertsner brought it back by listening to clients. But what is so special about IBM's sales process? Perhaps that is the place to look for the moat and that is misunderstood. Maybe the tech is actually a distraction or rather a problem that can be overcome whether you are first or last. I'm reminded of the belief - technology sells itself and as it turns out, no it doesn't you have to actually sell it. But why is IBM good at this?

[sleepydragon]

If you read Hagstrom's The Warren Buffett way 3rd Edition, there's a section on iBM - https://books.google.ca/books?id=lXnxAAAAQBAJ&pg=PT116&lpg=PT116&dq=ibm+shares+outstanding+1992&source=bl&ots=Y3RYmHgzyH&sig=pBhv5KByaiIxeDsONHOjAZxOGGM&hl=en&sa=X&ved=0CDEQ6AEwBGoVChMIzumapZ-HyQIVTqKICh3utQa2#v=onepage&q=ibm%20shares%20outstanding%201992&f=false

 

It says it hit Buffett 'right between the eyes' that IBM's competitive advantage is its salesforce and finding and keeping clients. That's the moat, not the technology. This makes sense. That's the premise of investment. Makes sense too as Buffett isn't very good at predicting cash flows from tech companies.

 

But I will agree Amazon is a big threat if they have a good sales force and are able to take business away from IBM's clients. But in the end, it's a battle for IT spending.

 

But does anyone understand why IBM's salesforce is so much better than any of the other companies in a commodity oriented business? I am inclined to agree somewhat because in 1993 when IBM almost went belly up, Gertsner brought it back by listening to clients. But what is so special about IBM's sales process? Perhaps that is the place to look for the moat and that is misunderstood. Maybe the tech is actually a distraction or rather a problem that can be overcome whether you are first or last. I'm reminded of the belief - technology sells itself and as it turns out, no it doesn't you have to actually sell it. But why is IBM good at this?

 

1. Ibm do more customizations instead of just trying to sell u a product like emc. 2. They spend way more times to test their systems before rolling out to clients. I think the support is better. I think for their big clients, they actually have a mba graduate sit at the client site for any issues that may come up. For dell and hp, you have to call a 1800 number and they frequently dont show up.

[Spekulatius]

1. Ibm do more customizations instead of just trying to sell u a product like emc. 2. They spend way more times to test their systems before rolling out to clients. I think the support is better. I think for their big clients, they actually have a mba graduate sit at the client site for any issues that may come up. For dell and hp, you have to call a 1800 number and they frequently dont show up.

 

How is an MBA going to help if there is a technical problem?

 

While  IBM sales force traditionally has been considered their strength, I think ORCL salesforce nowadays is probably better and more aggressive, possibly because Larry is breathing down their necks.

[portfolio14]

[iBM] Over the last ten years, Operating Margin is up 10% to 25%

...

How many businesses earn that level of return on capital?  How about Amazon, what is their Operating Margin? Answer 5.5%. Net Profit Margin? 0%. Return on capital? 0%.  Why does Amazon get a pass?  Why is nobody complaining about amazon's returns on their investments?.  What is Amazon's FCF yield?

 

IIRC, AWS' op margin was 20% last quarter. Consider this didn't involve selling expensive boxes nor s/w licenses upfront, this looks incredible.

 

 

[jason]

Is anyone concerned by the amount of debt IBM is taking on to 1. Pay Dividends and 2 Buyback shares? 

 

I haven't researched this much but just looking at the 10 years on morning star and the number that pops out is the huge amounts of debt they are taking on. 

[rpadebet]

I don't believe WEB likes IBM for the cash it throws his way. He has been trying hard to get capital allocation at BRK automated as much as possible. So making it an operating subsidiary reverses some of that effort.

 

I can see value in the sales force angle and customer customization angle.

 

The strongest form of moat known in business is a network effect. Could there be a network effect here between IBM customers? Something like only a IBM mainframe at customer A can talk to an IBM mainframe at customer B? Kind of like how most of corporate America is beholden to Microsoft Office and the financial industry to Bloomberg terminals?

 

I think I remember Jamie Dimon talk about the arcane payment stacks in the financial world and how that is the reason new currencies and innovative  payment systems find it hard to replace the old order. Say those stacks were built on mainframes,which is highly likely, then it is incredibly hard to move away from IBM. You need everyone in your ecosystem decide to migrate and migrate together to a different platform and that is virtually impossible in a competitive world.

 

Same thing for government systems. The entire govt needs to migrate together. Imagine the cost and short term disruption it can cause. Which bureaucrat would want to take such career risk especially when his upside is capped ?

 

If this is true then IBM has an unbeatable moat in a decent sized niche. They could build off that eventually.

[dwy000]

Is anyone concerned by the amount of debt IBM is taking on to 1. Pay Dividends and 2 Buyback shares? 

 

I haven't researched this much but just looking at the 10 years on morning star and the number that pops out is the huge amounts of debt they are taking on.

 

Vast majority of the debt is related to the financing business and is matched with assets in that business (at a 7 -1 leverage rate). 

[scorpioncapital]

I feel that claims of IBM's demise in cloud computing is totally overblown. That more and more businesses prefer AWS or Microsoft or IBM is partially simply a sales function. Go out and sell your service. If IBM has good relationships, they will get sales for their own solutions. Then I thought about the network effect. But is there one for enterprises looking to setup services for their business or customers? Ebay becomes more useful the more people buy and sell on that platform. But generally one enterprise is not going to care if some other enterprise is using the same platform. So it'll come down to quality of product and sales.

 

Iaas, being the most commoditized, seems like it will just be a fight to slim margins (AWS does alot of this)

Paas has a better future (Aws also does alot of this)

Saas seems very interesting and high margin. To this end, I am impressed with what IBM is doing. Watson is a unique service in the cloud. Same with the weather forecasting service. In the end, it'll come down to what service you can offer. I'm thinking something like Quicken. It was a desktop product, then Intuit made it into a cloud service. This really does sound like moving to higher value.

[jason]

Is anyone concerned by the amount of debt IBM is taking on to 1. Pay Dividends and 2 Buyback shares? 

 

I haven't researched this much but just looking at the 10 years on morning star and the number that pops out is the huge amounts of debt they are taking on.

 

Vast majority of the debt is related to the financing business and is matched with assets in that business (at a 7 -1 leverage rate).

 

Is there any way to break out the portion related to share buy backs and dividends? It seems counter intuitive to take on more debt to buy back more shares.  Shouldnt they just reduce the buybacks in years where cashflow is insufficient?

[rogermunibond]

Interesting side note on the Weather Co digital purchase. I was going through an AWS conference slide deck from 2013 and noticed that Weather Co. was a customer. They talked a lot about how they use AWS for their digital distribution to airline customers.  Guess who has like 90% of airlines as customers for IT services.  IBM, so a nice acquisition to strengthen the array of services they offer the airlines. And ostensibly takes away a big AWS customer.

[vinod1]

To me IBM moat is

 

1. Their entrenched relationship with the big fortune 1000 businesses (especially financial institutions). IBM is already present in most of these companies and their salespeople have relationships with the executives at these companies. So they have an early view into any new opportunities coming up at the client and when you combine this with "no one gets fired for hiring IBM" it does gives them a very good shot at these opportunities. Nothing insourmountable for competitors but it allows IBM to get their share of the business even if they are just on par with their competitors.

 

2. Switching costs in

a) Services via long term outsourcing contracts. Also expensive and time consuming to transition to a new vendor or back to the company.

b) Software (middleware): Many applications run on them or connect with other applications and it is a nightmare to replace these with competing products.

c) Mainframes: Stuff was written decades ago, works well and used for core operations. Frequently they are also integrated with a ton of other systems. Very risky and expensive to transition to newer environments.

 

More importantly the combination of #1 and #2 makes their moat more stronger.

 

When I was working at one SIFI they tried to migrate off the mainframe about 13 years back. It was a big effort involving 150 odd people directly billed to that project and hundreds more supporting them over a 2 1/2 year period. Despite all this they had issues during integration testing and the company just did not want to risk it and scrapped the effort. Must has cost $100 million or so. The executive in charge found himself spending quality time with his family within a short time. After that there is no more talk about migrating and in fact have build a ton of other applications around it.

 

As industry undergoes shifts, IBM would need to correspondingly adjust as well. When the shift is not disruptive and adds to their business like e-commerce was in 2000's and Big data/analytics was currently they do a pretty good job of making the shift. But when it is disruptive to their business like in the early 1990s with PC's and now to Cloud, they tend to be a bit behind.

 

There is no doubt IBM is in the midst of one the shifts and the financial performance is a reflection of that. To me they have a strong hand and their chances of successfully making this shift are good. But it is not a sure thing.

 

Cloud threat is more subtle but I am tired of the typing and stop it here.

 

Vinod

[dwy000]

Is anyone concerned by the amount of debt IBM is taking on to 1. Pay Dividends and 2 Buyback shares? 

 

I haven't researched this much but just looking at the 10 years on morning star and the number that pops out is the huge amounts of debt they are taking on.

 

Vast majority of the debt is related to the financing business and is matched with assets in that business (at a 7 -1 leverage rate).

 

Is there any way to break out the portion related to share buy backs and dividends? It seems counter intuitive to take on more debt to buy back more shares.  Shouldnt they just reduce the buybacks in years where cashflow is insufficient?

They break out the financing debt so the rest is corporate debt that can be used for any purpose.  As long as the company earns more than their cost of debt (which is very low for IBM) then taking on debt to buy back stock should be a net gain for shareholders - up to a point obviously.

[AzCactus]

To me it's interesting that Buffett said "we currently have no intention...," not sure if he's saying this just to give himself a potential out or if he actually isn't as sure about this investment as he'd like to be. 

[KCLarkin]

IIRC, AWS' op margin was 20% last quarter. Consider this didn't involve selling expensive boxes nor s/w licenses upfront, this looks incredible.

 

Ignoring the accounting chutzpah* at Amazon, I think we can all agree that AWS is a wonderful business. Everyone knows this, so :

 

AWS trades at 9x sales**

IBM trades at 9x earnings

 

This is where the concepts of Graham's voting machine, Munger's Pari Mutuel system, Mark's 2nd level thinking become very interesting. AWS is a better company, but is it a better investment?

 

---

* Like a good dotcom, SBC is excluded. It is also not immediately clear from the 10Q how they are allocating depreciation for their capital leases.

** Totally made-up. But I think that is a conservative estimate since most of the 2x in market cap over the last year was triggered by reporting AWS separately.

[Jurgis]

This is where the concepts of Graham's voting machine, Munger's Pari Mutuel system, Mark's 2nd level thinking become very interesting. AWS is a better company, but is it a better investment?

 

This is a wrong question to ask. Nobody's holding a gun to your head to choose AMZN or IBM.

It's possible that both of them are bad investments.

[KCLarkin]

Just for fun:

Still, for really long-term investors, consider this: If you had bought a share of IBM when it first listed on the NYSE at $47, you would now own 11,879 shares with a value of $1.6-million, according to the company. That’s a 3.4 million per cent return.

 

Note: I know that past performance is meaningless and IBM is doomed, so you can skip the annoying comments. I just think it is a fun stat.

[portfolio14]

Interesting side note on the Weather Co digital purchase. I was going through an AWS conference slide deck from 2013 and noticed that Weather Co. was a customer. They talked a lot about how they use AWS for their digital distribution to airline customers.  Guess who has like 90% of airlines as customers for IT services.  IBM, so a nice acquisition to strengthen the array of services they offer the airlines. And ostensibly takes away a big AWS customer.

 

This just doesn't feel right. This is getting into "content", similar to Netflix financing productions of content. Netflix's strategy makes sense. Not sure about IBM's.

[scorpioncapital]

https://medium.com/@fakehfm/a-few-thoughts-on-warren-buffett-s-investment-in-ibm-5731496e8089

[LowIQinvestor]

I think this "not chasing after revenue growth" is a straw man. I think most critics of IBM, including myself get that IBM is trying to become smaller and shed business units, which will hurt revenue growth. The main reason people don't like IBM is because they don't feel it will be technologically and commercially relevant in the future, not because of the lack of revenue growth. If this line of reasoning is correct, repurchasing shares is not going to solve the problem.

 

Anyways, what is the target return that longs have here?

 

Can we invert this question and talk about the return potential from the short side with IBM $ 133/share? I'm serious, would like to hear from anyone short IBM---what should IBM be worth?

 

 

[orthopa]

I think this "not chasing after revenue growth" is a straw man. I think most critics of IBM, including myself get that IBM is trying to become smaller and shed business units, which will hurt revenue growth. The main reason people don't like IBM is because they don't feel it will be technologically and commercially relevant in the future, not because of the lack of revenue growth. If this line of reasoning is correct, repurchasing shares is not going to solve the problem.

 

Anyways, what is the target return that longs have here?

 

Can we invert this question and talk about the return potential from the short side with IBM $ 133/share? I'm serious, would like to hear from anyone short IBM---what should IBM be worth?

 

 

 

+1

[ccplz]

Just for fun:

Still, for really long-term investors, consider this: If you had bought a share of IBM when it first listed on the NYSE at $47, you would now own 11,879 shares with a value of $1.6-million, according to the company. That’s a 3.4 million per cent return.

 

Note: I know that past performance is meaningless and IBM is doomed, so you can skip the annoying comments. I just think it is a fun stat.

 

Why is it fun? What's fun about an irrelevant stat?

[RichardGibbons]

Just for fun:

Still, for really long-term investors, consider this: If you had bought a share of IBM when it first listed on the NYSE at $47, you would now own 11,879 shares with a value of $1.6-million, according to the company. That’s a 3.4 million per cent return.

 

Note: I know that past performance is meaningless and IBM is doomed, so you can skip the annoying comments. I just think it is a fun stat.

 

Why is it fun? What's fun about an irrelevant stat?

 

I'm glad you asked, ccplz!  I can understand that you're struggling with this a bit, but I can clear it up for you.

 

You see, one of the things that people find amusing or interesting is an incongruence between their expectations and reality. Many jokes are based on this principle. For instance, this joke: "My friend David had his ID stolen the other day, so now he's just Dav."

 

Now, humans are generally pretty good at understanding linear progressions, but fairly bad when it comes to exponential progressions.  Thus, if you give someone an example of an exponential progression and ask them to project it into the future, their guesses will often be wildly inaccurate, far below the actual value.

 

Compound growth in stocks is like this. Thus, when someone naively projects what a single share that was bought at IPO would be worth now, it is natural for them to guess low. So--to join the dots for you, this is the expectation part. Their expectation is likely low.

 

But then they're told that the value is actually high!  Surprise!  There is an incongruence between what they expected, and what is actually true! 

 

See?  Fun!

 

What's more, it's even better than that!  Like any great story, there's also a good underlying message. In this case, the message is, "if you allow investments to grow tax free over a really long time, compounding even a small investment will make you rich."

 

Hopefully that's clear enough for you to understand, because it's quite a useful concept, one I think you'll find applies to many fun things in the future!

[NomadicRiley]

I think this "not chasing after revenue growth" is a straw man. I think most critics of IBM, including myself get that IBM is trying to become smaller and shed business units, which will hurt revenue growth. The main reason people don't like IBM is because they don't feel it will be technologically and commercially relevant in the future, not because of the lack of revenue growth. If this line of reasoning is correct, repurchasing shares is not going to solve the problem.

 

Anyways, what is the target return that longs have here?

 

Can we invert this question and talk about the return potential from the short side with IBM $ 133/share? I'm serious, would like to hear from anyone short IBM---what should IBM be worth?

 

I'm not short IBM, but the short case for IBM is simple. 

 

The technologies and services that IBM has been so successful selling to the Fortune 500 is a rapidly shrinking market.  GE, Coke, John Deere, BMW, Capital One and others have all publicly announced they are eliminating the majority of their datacenters and moving to the public cloud (primarily Amazon).  Each of those datacenters is currently full of very expensive hardware, software and services that have been purchased from IBM, EMC, Cisco, Oracle and other traditional Fortune 500 IT providers.  This move to the cloud will substantially reduce Fortune 500 spend among the traditional IT providers and put them at risk of joining the long list of premiere technology firms that were made obsolete (DEC, Sun, Silicon Graphics, etc).

 

 

[AzCactus]

I think this "not chasing after revenue growth" is a straw man. I think most critics of IBM, including myself get that IBM is trying to become smaller and shed business units, which will hurt revenue growth. The main reason people don't like IBM is because they don't feel it will be technologically and commercially relevant in the future, not because of the lack of revenue growth. If this line of reasoning is correct, repurchasing shares is not going to solve the problem.

 

Anyways, what is the target return that longs have here?

 

Can we invert this question and talk about the return potential from the short side with IBM $ 133/share? I'm serious, would like to hear from anyone short IBM---what should IBM be worth?

 

I'm not short IBM, but the short case for IBM is simple. 

 

The technologies and services that IBM has been so successful selling to the Fortune 500 is a rapidly shrinking market.  GE, Coke, John Deere, BMW, Capital One and others have all publicly announced they are eliminating the majority of their datacenters and moving to the public cloud (primarily Amazon).  Each of those datacenters is currently full of very expensive hardware, software and services that have been purchased from IBM, EMC, Cisco, Oracle and other traditional Fortune 500 IT providers.  This move to the cloud will substantially reduce Fortune 500 spend among the traditional IT providers and put them at risk of joining the long list of premiere technology firms that were made obsolete (DEC, Sun, Silicon Graphics, etc).

 

One would like to think Buffett was aware of that before making it one of his top 5 positions.