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Why Warren Buffett Offloaded His IBM Investments

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Warren Buffett invested in IBM in 2011

IBM’s (IBM) investors pay close attention to the company’s FCF (free cash flow). According to CNBC, Warren Buffett’s Berkshire Hathaway (BRK.A) bought $10.7 billion in IBM stock in 2011, and then completely it sold off this year. Why did Buffett do that? He’s known to invest in companies with a solid FCF history.

Berkshire Hathaway (BRK.B) invested in IBM in 2011, when the company generated $16.6 billion in FCF. However, as the chart below shows, this metric has continued to decline. IBM is expected to generate only $12 billion in FCF by the end of this year. Buffett may not have expected the metric to decline this much when he first invested in IBM.

IBM Free Cash Flow

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IBM’s FCF could decline further

Previously, we discussed how IBM’s revenue growth has declined in most quarters over the last six years. This fall has certainly played a role in IBM’s FCF decline over the years. Although IBM returned to positive revenue growth in three of the last four quarters (Q4 2017, Q1 2018, and Q2 2018), it still expects its FCF to fall YoY (year-over-year) from $13 billion to $12 billion this year.

The company attributed this decline to capex growth, cash tax headwinds, and working capital efficiency achieved through the launch of new mainframe products last year. IBM’s capex increased 21% YoY in the last quarter, mainly due to its increased cloud product investments.

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