IBM just used part of its cash hoard plus a lot of debt to buy Red Hat which is a Linux software and cloud computing company. The purchase comes on the heels of a weak quarterly report due to soft software and server sales. And, news of the purchase drove the stock a bit lower. We have ask, is IBM a good long term investment?

International Business Machines

IBM has been around since 1911 and took the name International Business Machines in 1924. The company has been a dominant presence in the world of computing and basic research for decades. Over that time its employees have earns five national medals of science, 10 National Medal of Technology, 6 Turing awards, and 5 Nobel prizes. Inventions from IBM include the SQL programming the language, automatic teller machines, bar codes, DRAM (dynamic random access memory), and many others. The company holds the most US patents for any business.

Through the middle of the 20th century IBM dominated the marker for the large main frame computers that were necessary for large businesses and governmental organization. But, the company was caught napping by the advent of the personal computer and faster and more efficient computer chips and programming. In its attempt to catch up with Apple computer it gave Bill Gates and Microsoft a start by using its operating system for their computers. Gates was quoted as saying that many billionaires were created by the need to fix various inadequacies in the IBM personal computer design.

IBM lost its dominant position in the computing world is the need for its huge mainframe computers diminished. Smaller and networked computers took over the work of large mainframes and then cloud computing took away the need for mainframes in the office. Part of IBM’s purchase of Red Hat is to strengthen its position in the world of cloud computing.

Although IBM with its huge research base and cadre of brilliant scientists was well-positioned to develop things like smart phones and search engine software, they never did and the lead in these areas went to companies like Google, Apple, and not-so-little-any-more Microsoft.

IBM is still an impressive company but does it have a strong future or is the tech world passing it by? Is IBM a good long term investment with is more than 5% dividend?

IBM Shares

Five years ago in 2013, IBM peaked above $200 a share. Today, after a weak quarter and the Red Hat purchase, it is down to $125 a share. The company has had its ups and down over the years but does it have the intrinsic value to justify long term, buy and hold investment?

Over the last thirty years, IBM has steadily rotated out of non-profitable products and services and into products and services where it retains dominance and profitability. But, there is a sense that it is chasing an ever-shrinking set of market niches instead of using its robust research base to create new niches in which it could reassert its old dominance.

What Does Warren Buffett See in This Company?

A major shareholder in IBM is the all-time king of long term investing, Warren Buffett. Forbes looks at Buffett, IBM and long term investing.

There are those that think Buffett’s stake in IBM is curious, not only because of his openly cautious approach to tech over the years but also because of the world’s continuing shift toward cloud computing–and the threat it represents to the makers of computing devices. But Buffett doesn’t make investments without having a concrete reasons for doing so. In his 2011 letter to Berkshire Hathaway shareholders, Buffett explained his foray into IBM as founded on the belief that the company would deliver benefits in the form of billions of dollars in dividends and repurchases over time.

It is useful to recall that when Buffett started out his investment strategy was picking companies that were doing poorly, fixing them up, and then selling after the stock price went up and before the company headed downward again. The strategy was known as the “last puff from the cigar.” If this is what Buffett is doing here, we should watch for when he decides to get out and then all head for the exit.

The long term problem with IBM is that it has not used its brain power to develop new and profitable product lines. For IBM to be a good long term investment, this needs to change.



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