:max_bytes(150000):strip_icc()/GettyImages-2241942383-a6ae21b5c891432b878d21eed9aea185.jpg "IBM Beat Sales and Earnings Estimates. Here’s Why Its Stock Is Falling Anyway")
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Key Takeaways
- IBM shares slid on Thursday as investors scrutinized the tech giant’s third-quarter earnings and focused on slowing cloud growth.
- IBM delivered “an overall clean quarter” according to Bank of America analysts, who reiterated their “Buy” rating on the stock.
The devil is in the details, as they say.
Shares of IBM (IBM) slid Thursday after the tech company’s third-quarter results exceeded expectations on the top and bottom lines, but contained a few tidbits that left Wall Street disappointed.
IBM reported adjusted earnings of $2.65 per share, up 15% from the year-ago quarter and above the consensus estimate of $2.44. Third-quarter revenue increased 9% to $16.3 billion, also beating expectations. IBM also raised its full-year revenue and free cash flow forecasts.
Nonetheless, IBM shares were down 1.5% in recent trading, after falling as much as 8% earlier in the session, as investors focused on softness in the company’s software business.
Why This Is Important
The market’s reaction to IBM’s solid quarter underscores the high expectations that investors have for tech companies heading into this earnings season. Next week, five tech giants with a combined market cap of about $15 trillion will report earnings. Due to their size, big moves in their stocks would have a significant impact on the major indexes.
Sales growth at IBM’s Hybrid Cloud unit, a division of its software segment, decelerated to 12% in constant currency from 14% in the second quarter. Transaction processing revenue declined for the second consecutive quarter, falling 3%.
“IBM reported an overall clean quarter,” wrote Bank of America analysts in a note on Thursday. They maintained their “Buy” rating on the stock, “as IBM is mixing up to higher margin Software and driving strong [free cash flow] and we expect continued positive estimate revisions.”
Wall Street’s negative reaction to IBM’s beat-and-raise quarter could be ominous for tech investors. The bulk of the Magnificent Seven is slated to report results next week, and with most of the group trading at or near record highs, their results may need to handily beat estimates for Wall Street to be impressed.
That said, investors weren’t reading too much into IBM’s slowing cloud growth on Thursday. All of the Magnificent Seven were trading in the green.
