Just Like Warren Buffett, You Should Also Put IBM's…

Just Like Warren Buffett, You Should Also Put IBM's Stock in the Garbage Can and Light It on Fire

One definitely can't blame the "Oracle of Omaha" for cutting bait on tech giant IBM (IBM) .

Warren Buffett has reportedly slashed his 81 million share stake in IBM by about a third. "I don't value IBM the same way that I did 6 years ago when I started buying -- I've revalued it somewhat downward," Buffett said to CNBC. "When it got above $180 we actually sold a reasonable amount of stock."

As TheStreet reported in late April, IBM deserves to be revalued by investors like Buffett.

Any average investor sitting at home trying to decipher what IBM said on its first quarter earnings call would have a hard time -- most of it may not have been in the English language. Talk about corporate speak (and attitude -- the tone of the call sounded as if IBM smashed estimates and is close to curing the common cold) in its finest form.

Besides that, it's very likely that after the quarter IBM had, that shares will continue to get re-rated by the market (shares are down 8 percent in the past month), for one simple reason: Investors are likely to more closely scrutinize the tech giant's transition from a hardware entity to a software and services provider. How could one not do this?

IBM's sales have declined for 20 straight quarters, in large part due to weakness in hardware. For the first quarter, sales from IBM's hardware and operating systems segment plunged 16.8 percent to $1.4 billion. Meantime, revenue at the company's consulting business dropped 3 percent to $4 billion.

The cloud business fell short of Wall Street's estimates, as IBM blamed the timing of contracts being signed. Despite cloud sales rising 33 percent to $3.5 billion, you didn't get the sense the business -- which has been built up through acquisitions -- is poised to grow at a rate that soon wipes out softness in hardware. Not when Amazon (AMZN) and Alphabet (GOOGL) are also major players in cloud.

And that brings up the 1,000 lb gorilla in the room: does IBM deserve the benefit of the doubt after such a squishy quarter? Probably not, given how the stock has performed, or should we say underperformed. IBM shares have declined 21 percent over the past five years, severely lagging the broader Dow Jones Industrial Average and S&P 500. Microsoft (MSFT) has surged 120 percent during that span, while Alphabet -- a stock that is held by the Action Alerts PLUS that Jim Cramer co-manages -- has racked up a 209 percent gain.

If a legendary investor like Buffett is now questioning IBM's transition, why aren't you?

Updated from April 22 with new details.

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