IBM stock tumbled Thursday as investors digested a mixed third quarter earnings report the tech giant published late Wednesday. Earnings beat expectations but IBM's revenue came in lower than expected despite strong growth for its software operations.
IBM said adjusted earnings grew 5% year over year to $2.30 per share for the September-ended quarter. That was ahead of FactSet analysts consensus estimate of $2.22 per share. But the Armonk, N.Y.-based firm's revenue grew 1% to $14.97 billion, just below the $15.08 billion analysts previously projected.
The company's sales came in light despite revenue growth accelerating for IBM's software sector. That positive news was offset by weaker performances from IBM's consulting and infrastructure businesses.
"While the stock could get hit in the immediate term — the software mix shift is accelerating, softening the blow and helping margins," wrote Melius Research analyst Ben Reitzes following the report. "Long-term investors want this — and can stay on board as this occurs."
On the stock market today, IBM stock fell more than 6% to close at 218.28. Shares broke below the stock's 21-day moving average but remain above the long-term 50-day moving average support level.
IBM Stock: AI Book Of Business Reaches $3 Billion
Excitement about IBM's potential to deliver generative AI tools to enterprises has helped shares of the more-than-century-old tech giant rally over 70% in the past 12 months. Share value hit a record high for the first time in a decade last month.
In a news release late Wednesday, the company touted its AI progress.
"We continue to see great momentum in AI as our models are trusted, fit-for-purpose, and lower cost, with performance leadership," Chief Executive Arvind Krishna said in a written statement. "Our generative AI book of business now stands at more than $3 billion, up more than $1 billion quarter to quarter."
It was a strong quarter overall for IBM's software business. Sales grew 9.7% year over year to $6.5 billion for Q3, up from 7.1% growth in the second quarter.
The sales growth acceleration was helped by Red Hat, the cloud software firm IBM acquired for $34 billion in 2019. Red Hat-related software sales grew 14% year over year in the third quarter, compared with 7% in the second quarter.
However, IBM's revenue from consulting fell a half-percent year over year to $5.2 billion. Sales from IBM's infrastructure business fell 7% to $3 billion.
"Too bad IBM has three segments and not just one (at least today)," Melius' Reitzes wrote in his client note. "Consulting just isn't turning, but the infrastructure miss is excusable to us since just about everyone knows a new mainframe is coming in first half 2025."
Melius rates IBM stock a buy.
IBM Forecast For Q4
Meanwhile, IBM said it expects fourth-quarter sales to grow at a similar rate to the 1% growth in the third quarter. The firm maintained its forecast for $12 billion in free cash flow for the full year.
"With our strong cash generation, we are well-positioned to continue investing for growth while returning value to shareholders through dividends," Chief Financial Officer James Kavanaugh said in the company's news release.
Following the report, analysts with BofA Securities kept their price target of 250 for IBM stock and reiterated a buy rating.
"Despite the quarter being a mixed bag, management sounded confident in their 2025 commentary," BofA analyst Wamsi Mohan wrote to clients Thursday. "Specifically, management guided Red Hat to see continued momentum, which could result in a roughly 3% lift year over year to the overall software segment in 2025. Combined with the Hashi Corp. acquisition closing next year, management noted confidence in software being at or above their long-term growth model."
On the other hand, Jefferies analysts reiterated a (neutral) hold call, despite what they called "encouraging" software and AI metrics.
"We believe that shares could continue to grind higher on further software strength (higher growth + higher margin), although lackluster consulting and infrastructure performance, as well as concerns around the monetization of AI keep us on the sidelines," Jefferies analyst Brent Thill wrote Thursday.
IBM Stock: Extended Past Buy Point
Thursday's action marks IBM's worst decline by total percentage since April 25, according to Dow Jones Market Research. IBM sank 8% that day after reporting lower-than-expected first quarter sales and announcing the $6.4 billion HashiCorp. deal.
Prior to the Q3 report, IBM stock closed regular trading Wednesday at 232.75, extended past a 196.26 cup-with-handle buy point identified by MarketSurge. Shares broke out past that level on Aug. 21 and have gained steadily in the weeks since.
IBM stock's Relative Strength Rating checks in at 91 out of a best-possible 99, according to IBD Stock Checkup, indicating IBM stock has outperformed 91% of stocks over the past 12 months.
