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Technology and consulting giant IBM (IBM) just released its Q3 earnings, showing mixed results that left investors disappointed. While the company exceeded profitability expectations, its revenue fell short, causing a notable drop in the stock price. Let's dive into IBM's Q3 performance, and what it means for investors going forward.
Mixed Q3 Financials
IBM delivered revenue of $14.97 billion in Q3, a modest increase of 1% compared to the same period last year. While the company saw strong performance in its software business, challenges in the consulting and infrastructure segments dampened overall results. Analysts had predicted revenue of $15.07 billion.
IBM stock has gained over 57% in one year, and is trading near an all-time high, driven by investors’ optimism around artificial intelligence (AI). This strong performance raised expectations ahead of the earnings report, meaning even a small miss was met with a swiftly negative investor reaction, and contributed to a 6.5% drop in its stock price at the last check.
On a positive note, IBM reported adjusted earnings of $2.30 per share, up 5% year-over-year, which exceeded Wall Street's forecast. The company benefited from a favorable portfolio mix, improved operating efficiencies, and productivity initiatives, which helped boost profit margins and strengthen the bottom line.
Consulting Weakness Expected to Continue
The consulting segment has faced challenges from macroeconomic factors, including geopolitical uncertainty, inflation, rising interest rates, and upcoming elections. Discretionary business spending has been scaled back, which IBM’s leadership noted as a reason for consulting softness. Unfortunately, this is expected to persist into Q4, with management projecting that consulting revenue will mirror Q3 performance.
While the consulting slump is disappointing, it’s important to note that the issues are temporary and tied to broader economic conditions. Once the economy normalizes, this segment has the potential for a rebound.
Software Segment Shines
IBM’s software business has been a standout performer despite the consulting struggles. Software revenue grew by 10%, driven by key growth platforms such as Hybrid Cloud, Automation, and Data Management. Red Hat, a significant part of IBM’s software portfolio, saw substantial growth, with products like OpenShift and Ansible experiencing more than 20% growth.
The strong demand for hybrid cloud solutions and automation tools, combined with Red Hat’s subscription business, positions IBM well for future growth.
Looking ahead, the company sees promising opportunities in areas like generative AI and virtualization solutions. IBM's AI products, including the new Watsonx Code Assistant, are gaining traction and could be a significant revenue driver moving forward.
What's Next for IBM?
IBM is focusing on high-growth segments such as hybrid cloud and AI, which will likely pay off in the long term. The company expects its software division to continue delivering solid results, with low double-digit revenue growth forecasted for Q4, driven by Red Hat and transaction processing. Heading into 2025, IBM expects the momentum in its software business to continue, with revenue growth anticipated to accelerate further.
While the consulting business may face near-term challenges, IBM's strong software performance, combined with potential growth from AI and cloud technologies, gives it room for optimism. Recent acquisitions further enhance IBM’s ability to transition into these high-demand sectors, which is positive. Moreover, IBM is poised to see an improved bottom line, driven by a better portfolio mix and enhanced operating efficiency.
Bottom Line: Is IBM Stock a Buy, Sell, or Hold?
IBM's Q3 results reflect both opportunity and caution. The company’s robust software growth is encouraging, but the ongoing weakness in consulting, particularly with shares trading near all-time highs, has analysts taking a more cautious stance.
For now, IBM stock carries a “Hold” consensus rating. Further, analysts’ average price target of $214.44 is lower than its current market price.
