Important points
- IBM’s stock dropped on Thursday as investors examined the tech giant’s third-quarter outcomes, especially noting the slowdown in cloud growth.
- Analysts at Bank of America described IBM’s quarter as “overall clean” and maintained their “buy” rating for the stock.
Sometimes, it’s really about the details.
On Thursday, IBM (IBM) saw its shares decline despite third-quarter results that exceeded expectations for both revenue and profits. There were, however, some nuances that didn’t sit well with Wall Street.
The company reported adjusted earnings per share of $2.65, marking a 15% increase from the previous year and surpassing the consensus estimate of $2.44. Sales for the third quarter climbed 9% to $16.3 billion, also beating forecasts. Additionally, IBM raised its projections for full-year sales and free cash flow.
Even so, IBM’s stock was down 1.5% in later trading, having initially dropped as much as 8% in the morning due to concerns over its software business’s performance.
Why this is important
The market’s response to IBM’s solid quarter highlights the lofty expectations investors have as this earnings season unfolds. Next week, five major tech firms, worth around $15 trillion in total market cap, are set to release their financial results. Given their collective size, significant changes in stock prices can heavily influence major indices.
Growth in IBM’s Hybrid Cloud sector, a part of its software division, decelerated to 12% at constant currency, down from 14% in the prior quarter. Meanwhile, transaction processing revenue fell for the second consecutive quarter, decreasing by 3%.
According to a note from Bank of America analysts, “IBM reported an overall clean quarter.” They keep a “buy” rating on the stock, citing the company’s strong performance alongside higher-margin software, and expressed optimism about ongoing positive revisions to forecasts.
The unfavorable reaction from Wall Street to what’s known as a beat-and-raise quarter could signal caution for tech investors. Many from the Magnificent Seven are expected to report results next week, but given that most are trading at or close to historic highs, they’ll likely need to significantly surpass expectations to truly impress the market.
Nonetheless, as of Thursday, investors seemed to be taking IBM’s slowing cloud growth in stride, as all members of the Magnificent Seven were trading positively.
