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Buffett's Big Blue buy is a bet on the future of tech

Nati Harnik / AP

Billionaire investor Warren Buffett speaks in Omaha, Neb., Monday, Nov. 14, 2011.

Warren Buffett made waves when he revealed Monday that he's purchased some 64 million shares of IBM that give him a 5.5 percent stake in the company. "They've done an incredible job," Buffett told CNBC, adding that he wished he'd started paying attention to the company five years ago.

Buffett isn't a typical tech investor, but IBM's not a typical tech company, either. Buffett's $10.7 billion investment is as much a prediction about the economic recovery and the evolution of enterprise technology as it is a vote of confidence in the company itself.

"What I think he's probably looking at is over 80 percent of total revenues and 90 percent of profits come from recurring revenue sources," said Brian Marshall, senior managing director at ISI Group. He added that IBM does a good job redistributing this largesse back to shareholders in the form of dividends and stock buybacks. "In the most recent quarter, they returned $4.3 billion to shareholders," Marshall said, pointing out that IBM's 1.6 percent return is better than the current rate on seven-year U.S. Treasuries.

That's impressive, but that's not the only reason Buffett wanted to get his hands on the stock. He spoke in his CNBC interview about being impressed by the company's road map for its future. Evercore Partners analyst Robert Cihra told CNBC on Monday that IBM is reaping the benefits today of its decision more than a decade ago to shift its focus from lower-margin businesses like hardware. Now, the $6 billion annually it spends on R&D targets solutions for businesses looking to use technology to improve marketing and sales.

But Big Blue is bumping up against the limits of how big an old-school tech company can get. ISI's Marshall called the size of IBM's geographic footprint and its reach into emerging markets the company's "secret sauce." But he said it will have a harder time generating big growth numbers in more mature markets like the U.S. "It's only top-line single-digit growth recently," he said.

Its edge is that IBM understands much better than other technology companies how computing is evolving and moving into spaces beyond its traditional IT-department turf, said R "Ray" Wang, principal analyst and CEO at Constellation Research. "We see IT department budgets dropping 5 percent yearly," he said. "But more importantly, when we look at our spending data, tech spending is up 18 to 22 percent."

Sales, marketing and other corporate operations are setting up cloud projects and investing in high-tech solutions for everything from integrating social media into interactive marketing to incorporating online and mobile sales channels into brick-and-mortar store inventory management.

Wang calls this movement the "consumerization of IT" and says it has big implications for IBM. He says events like IBM's 2010 purchase of CoreMetrics are evidence that the company is leaving the server room and venturing into other departments.  "That's what I think Buffett sees, is IBM is playing in both the business side of the house as well as the IT side of the house," he said. By contrast, "Oracle and Microsoft have been focused just on IT."

"They're going after tough business problems," Wang said. "They're doing it at a higher level."

Insight on why Warren Buffett, Berkshire Hathaway chairman/CEO has bought about $10.7 billion in IBM stock and 64 million shares of the company this year.