Previous plays such as a long-term position in IBM and a short-term fling with Oracle
—both of which specialize primarily in enterprise software—didn’t pan out.
". . .didn't pan out." Buffett clearly didn't learn his lesson from his failed stake in IBM.
By: Dan Gallagher
April 7, 2022 1:35 pm ET
https://www.wsj.com/articles/buffett-doubles-down-on-tech-hardware-with-hp-11649352908
When it comes to technology investing, Warren Buffett and his lieutenants have clearly decided to stick with what they know. That doesn’t mean a similar outcome is ensured.
In securities filings late Wednesday, Mr. Buffett’s Berkshire Hathaway BRK.B 0.52% disclosed a sizable stake in HP Inc. HPQ 14.75% The famed value investor now owns nearly 121 million shares—amounting to an ownership stake of about 11%—of the once-storied tech giant that makes personal computers and printers. And at least 11 million of those shares were bought after HP announced its deal late last month to acquire video communications gear maker Poly for about $1.7 billion in cash.
In other words, Mr. Buffett and his crew are effectively doubling down on tech hardware. It would be hard to blame them, based on their past forays into technology. Previous plays such as a long-term position in IBM and a short-term fling with Oracle —both of which specialize primarily in enterprise software—didn’t pan out. But Berkshire’s bet on Apple AAPL 0.18% that started in early 2016 has paid off handsomely. The iPhone maker’s market value has soared more than fivefold since then to just below the $3 trillion mark. Apple is now Berkshire’s single largest investment in a company it doesn’t control by market value.
HP will be hard-pressed to generate that kind of return, though. Even adding in Poly’s business now would leave nearly two-thirds of HP’s total revenue coming from PCs. This market got a strong boost from the pandemic, with workers rushing to set up their home offices. But analysts widely expect PCs to revert to low-single-digit growth going forward. And while HP deserves credit for cleaning up its print supply business—a major source of the company’s earnings—that too faces existential challenges with the rise of electronic document usage in remote work and school settings. Analysts expect HP’s print supply arm to average an annual revenue decline of nearly 3% over the next three fiscal years, according to consensus estimates by Visible Alpha.
Berkshire’s timing suggests the company is buying into HP’s plan to build some more diversity into its business. HP laid out aggressive growth targets for Poly based on the belief that its supply-chain muscle can clear Poly’s growing backlog of orders. And HP is likely eyeing other potential plays in hardware peripherals—all to grow its exposure to a hybrid workforce splitting its time between home and the office.
But HP also lacks Apple’s consumer cachet and the growing line of high-margin, recurring services revenue attached to the company’s devices. Toni Sacconaghi of Bernstein estimates that just three of those services—advertising, iCloud and Apple Care—generated a combined $31.2 billion in revenue in Apple’s most recent fiscal year, which is more than double HP’s entire print supply business. Berkshire’s massive success with Apple may have blinded the powerful investor to a long-known truth in the tech business: hardware is hard.