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TheStreet Open House

IBM Has Seen Undue Pessimism Keeping It From Old Tech Rally

NEW YORK (TheStreet) -- Reports of the death of the personal computer may have been greatly exaggerated. And as with most sweeping trends in technology, investors would have been wise to have been more skeptical.

Shares of Hewlett Packard (HPQ)  jumped as much as 6% on Thursday after the company announced surprising growth in its PC unit amid its quarterly earnings. The stock has gained 32% year to date, as investors realize that that predictions of tablets replacing personal computers were overdone.

Hewlett Packard isn't the only old tech giant that markets wrote off, only to realize that fears about its obsolescence may have been overdone this year either. Shares of Intel (INTC) are up 35% and Microsoft  (MSFT)   20% respectively, as investors realized the companies may be much better positioned for new technology trends than originally thought.

The question for investors now is whether markets have similarly gotten carried away with tech giant IBM (IBM) . The company has been left for dead, amid anxiety that the rise of cloud computing and competition from companies like Amazon (AMZN) will hammer its software business.

IBM was the only Dow component that failed to participate in the index's 24% rally last year, ending down 5% instead. Shares are flat this year despite a newfound enthusiasm for old tech names that has boosted Cisco (CSCO) and Xerox (XRX) by more than 10% over that period.

IBM shares are cheap, trading at 9.6 forward earnings, compared to about 18 for the S&P 500 index. The stock is hated on Wall Street. Only four of the 24 sell side analysts that cover the company recommend buying shares. By contrast, Wall Street darling Google (GOOGL) has 39 out of 47 analysts with a buy recommendation.

It's also a punching bag for short sellers. Among the most vocal of those is the legendary hedge fund manager Stanley Druckenmiller, who has said he is shorting the company, since it is failing to take on the "challenge of the Amazons of the world."

But fears of competition are overdone. While competitors like Amazon have made impressive headway in commodity areas like storage and computing, investors are underestimating how deeply entrenched IBM is in the high value, mission critical business processes of its customers. Rather than be swept aside by the rise of cloud computing as the market seems be anticipating, IBM is instead likely to continue to provide those services but just deliver them remotely.

Even as markets whipsaw around the next tech trend, Warren Buffett is able to take a longer view as he did when he bought a $10.7 billion stake at the end of 2011 to become the company's biggest shareholder.

In 2011, Buffet surveyed Berkshire Hathaway's (BRK.B) vast complex of IT managers in making his decision. After becoming interested in IBM, "we went around to all of our companies to see how their IT departments functioned and why they made the decisions they made," he said. "And I just came away with a different view of the position that IBM holds within IT departments and why they hold it and the stickiness and a whole bunch of things."

That stickiness will allow IBM to transition to the era of cloud computing far better than the market is currently anticipating.

He noted that "the dozens and dozens of IT departments at Berkshire "very much get working hand in glove with suppliers" and "that doesn't mean things won't change but it does mean that there's a lot of continuity to it."

Given the stock's lackluster performance since the initial purchase and recent alarm over competition, there was plenty of speculation that Buffett had soured on his position and was considering selling stock. But a filing with the SEC showed that as of June 30 Berkshire had actually boosted its stake during the second quarter by 3% - 70.2 million shares valued at $341.5 million - bringing it to a total of $13.2 billion.

Much less has likely changed in Berkshire's IT departments since Buffett started buying, in other words, than the market gloom suggests.

Markets can jump the gun when it comes to the prospects that old tech giants have in adapting to new trends as the about-face in the rest of the sector shows. And IBM could join the crowd once investors realize that the threats from cloud competition have been overblown.

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