How Warren Buffett’s IBM Sale Hurts the Dow and Hurts Ginni Rometty

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When Warren Buffett talks, people listen. Buffett confessed on Friday morning, ahead of the Berkshire Hathaway Inc. (NYSE: BRK-A) annual meeting, that he and his team had unloaded part of their massive stake in International Business Machines Corp. (NYSE: IBM). While there are some broader issues to consider here, the reality is that the early sell-off in IBM shares has put pressure on the Dow Jones Industrial Average.

Buffett told CNBC that he had sold about 30% of his stake in IBM after its shares hit $180 or so. He also said he stopped selling shares after they fell to about $160. This impact has ramifications for the Dow’s index change on Friday, and it has a role on what CEO Ginni Rometty’s future may hold.

Earlier in the week, Moody’s Investor Services actually downgraded IBM’s corporate credit rating. Moody’s does think IBM can grow what its calls its “strategic initiatives,” but the agency feels that Big Blue will spend more on those initiatives and on gradual acquisitions. Whether that credit rating cut from Moody’s will make IBM’s relative borrowing costs rise ahead remains to be seen.

The Dow is a price-weighted index rather than a market cap-weighted one, and IBM has the fifth highest weighting in the Dow, at 5.2%, behind UnitedHealth (5.69%), Boeing (5.98%), 3M (6.52%) and Goldman Sachs (7.41%).

If the Dow was a market-cap weighted index, IBM would have far less of a market impact on it. Its fifth highest price-weighting actually is ranked at number 11 of 30 (under the median market cap), with a $149 billion market cap.

To prove the point here: the S&P 500 Index is a market cap weighted index, and it was up $1.80 (almost 0.1%) while the Dow was down 25 points (over 0.1%), while and the Nasdaq was up four points (almost 0.1%). These are not huge numbers on the surface, but imagine if there is a day when IBM shares were down more than the $4.03 (or −2.5%) at $155.02.

As far as what the IBM stake sale really means, let’s see what Buffett actually told CNBC about what made him change his mind about the value of Big Blue:

I think if you look back at what they were projecting and how they thought the business would develop I would say what they’ve run into is some pretty tough competitors. IBM is a big strong company, but they’ve got big strong competitors too.

Buffett said his sales were based on a lot of things. This was noted as IBM’s earnings and the decline in sales over time not proving to have as wide of a moat as he once thought. Buffett’s strong competition is coming from Jeff Bezos of Amazon.com Inc. (NASDAQ: AMZN) and Satya Nadella of Microsoft Corp. (NASDAQ: MSFT). These two companies are more than formidable competitors against IBM in the cloud computing business. IBM’s Watson, its artificial intelligence business, is still growing handily, just not fast enough to stop the bleeding in IBM’s core IT-services operations.

IBM has now posted almost 20 disappointing quarters of negative revenue trends, and Thomson Reuters does not see that revenue inversion changing very much (if at all) through 2020. IBM’s revenues were $104 billion in 2012, and they have slid ever since. Thomson Reuters sees a 2.1% sales drop to $78.3 billion in 2017, followed by $78.2 billion in 2018, $78.0 billion in 2019 and $75.2 billion in 2020.