Buffett's big bet on Big Blue shows signs of life

Buffett's big bet on IBM showing signs of life
Buffett's big bet on IBM showing signs of life

Warren Buffett is very close to finally turning a profit on his bet on IBM (dividends aside). The level to watch is $170.43 — that's the average price he paid per share of IBM, and we are just a few dollars away.

Once it hits that mark, Berkshire Hathaway breaks even and starts to make money on its investment — one of Buffett's most controversial.

He started buying in 2011, and has accumulated a nearly 8.6% stake. But shares sunk over the next few years and Berkshire announced losses in the billions at one point.

Buffett kept the faith though, telling CNBC last year, "What you pay for a stock doesn't mean anything. What means something is where the company's going to be in five to 10 years. I think IBM will be worth more money but, like I said, I could be wrong but we'll accept that."

Now, his patience may finally be paying off.

Back in 2011 when he started buying shares, he told CNBC that he liked Big Blue because they lay out clear road maps and execute. He also pointed to IBM's position in other companies' IT departments, and IBM's propensity for stock buybacks. Since the beginning of 2012 through the third quarter of 2016, IBM has repurchased $46.8 billion in stock.

But other investors have disagreed. Even with the recent revival, IBM stock has underperformed over a longer time frame and analysts still cite among their concerns: declining revenue, questions over commercializing Watson, and Amazon's and Microsoft's lead in cloud.

And some see buybacks and dividends in a different light -- as financial engineering that has served investors better than IBM's own clients and business. To that point, Buffett has made about $1.7 billion in dividends though his holdings while IBM has recorded 18 straight quarters of declining revenue.

Also keep in mind that Buffett may be close to breaking even on his investment, but if you've been holding the stock for, say, 7 years — since the Dow crossed 10,000 — IBM has been one of the biggest tech underperformers, returning less than half the S&P 500 in that time.

Buffett, though, is Buffett. He's in it for the long game and he's sticking with Big Blue.

And there are signs that analysts are starting to up their expectations for IBM. Earlier this week, Morgan Stanley raised its price target on the stock to $187 from $179 and made it one of their top picks for 2017. Stifel also raised its target to $192 from $165, citing "a belief that the worst is behind them."

If IBM reaches those levels, Buffett is more than vindicated — he's made yet another fortune.