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Buffett's investment in science and technology: gradually reducing IBM stock to increase Apple stock

via:CnBeta     time:2018/2/24 17:09:11     readed:604

However, it is unfair to say that Buffett completely gave up his old stance on technology: his investment in technology has tended to favor (at least ostensibly) businesses that generate strong cash flow in the coming years. Recently, he increased his stake in Apple and gave up almost IBM's shares.

Prior to Buffett's annual letter to shareholders of Berkshire Hathaway (BRK.A) on February 24, Berkshire disclosed in its Q4-quarter 13-F paper that the previous quarter was down IBM cut 35 million shares to $ 2 million. The group also disclosed that its Apple stock has increased from 134.1 million shares to 165.3 million shares (currently worth 29 billion U.S. dollars). According to FactSet data, this is equivalent to Apple's 3.25% ownership.

In the other two technology companies - name registrar Verisign (VRSN) and insurance risk analysis firm Verisk Analytics (VRSK) - the position remained at 13 million and 160 million shares.

IBM's 2018 earnings per share forecast for January earnings release was slightly below expectations before close to liquidation and predicted its free cash flow (FCF) would fall by $ 1 billion to about $ 12 billion this year. In fact, IBM's FCF has plunged from a peak of $ 18.2 billion in 2012, undoubtedly affecting Buffett, Charlemagne and other Berkshire investment teams.

On the other hand, Apple's FCF increased from $ 33 billion in fiscal year 2011 (ended September 2011) to $ 51.1 billion in fiscal 2011. In spite of this, forced by the near futureiPhoneX's sales pressure, analysts on average expected Apple FCF in fiscal year 2018 rose 13% to 57.8 billion US dollars.

For VeriSign, its FCF growth rate over the past five years was 48%, reaching 720 million U.S. dollars. Verisk has risen 42% to $ 560 million.

But not just the growth of the FCF, Apple, Verisign and Verisk differ from IBM in that the first three companies all have a business model that protects them from technology.

While Apple relies on major chipsets, hardware and software engineering investments to make it a technology company, its brand loyalty to moats, ecosystem sticking and high price makes the investment image closer to large consumer brands in some ways. In particular, its services (App Store, Apple Music, iCloud, AppleCare, etc.) increase customer loyalty and create new recurring revenue streams.

Similarly, Verisign controls both .com and .netdomain nameLong-term contracts with registries provide some degree of predictability to their business, and many technology companies are envious. Verisk's proprietary insurance risk data and long-term customer relationships have proven over the years that they will become massive moats for future competitors.

In addition, Alphabet, parent company of Google, is also a technology company with a broad moat. Due to its size and data, the company's core search business is close to a natural monopoly. YouTube, along with mobile search, has driven much of Google's recent revenue growth and is considered a natural monopoly.

Some IBM businesses, such as mainframe and transaction processing software units, do have healthy moats and a high level of customer stickiness. Long-term relationship between the company and many large enterprises and institutions is not easy to solve. However, with the backlash driven by top-line pressure in recent years, IBM is more vulnerable to competitive pressure and technological disruption than other Berkshire technology stocks.

Adoption of Amazon Web Services (AWS) and other major public cloud infrastructure platforms has put pressure on many IBM businesses. In some important software business, IBM also faces fromMicrosoft(MSFT) and Oracle (ORCL), as well as key service providers such as Accenture and Infosys (INFY).

IBM is unaware of this pressure and has been leaning toward mergers and acquisitions and partnerships to increase its competitiveness and increase its presence in the fast-growing IT market. But the long-term impact of considering and analyzing these challenges is beyond Buffett's traditional approach.

A few years later, Berkshire's IBM betting was poor and Buffett preferred to invest in technology that would not be too far from the historic comfort zone.

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