- IBM stock was down 7% after releasing Q3 earnings.
- The technology giant missed revenue estimates.
- Should investors buy the dip on IBM stock?
This popular AI stock is up some 33% YTD.
International Business Machines (NYSE:IBM), better known as IBM, saw its stock price fall about 7% on Thursday after it posted lackluster third-quarter results.
Big Blue has been having a terrific year, for the most part, as its stock price is up approximately 33% year-to-date, driven by its AI-enabled software business.
But the numbers were unexpectedly lower in Q3. Revenue was 1% higher at $15 billion, but it fell narrowly short of the $15.1 billion estimates.
It also had a $330 million net loss in the quarter, or -34 cents per share, down from a $1.7 billion net gain in the same quarter a year ago. However, this startling drop was related to a $2.7 billion one-time pension settlement charge of $2.7 billion.
On an adjusted basis, IBM generated $2.30 per share in earnings, up 5% year-over-year and better than consensus estimates.
Should investors be concerned about the revenue miss?
AI Revenue Up, Consulting Down
IBM’s largest revenue generator has been its software business, which includes its subsidiary Red Hat, along with its hybrid cloud and AI businesses, like watsonx, which are used to train and process generative AI data.
This has been IBM’s fastest growing business, fueled by its generative AI software. IBM Chairman and CEO Arvind Krishna said the firm’s generative AI book of business stands at more than $3 billion, up more than $1 billion from the previous quarter.
In the third quarter, the software segment saw revenue climb 10% year-over-year to $6.5 billion. Through the first nine months of 2024, software has produced $19.2 billion in revenue, up 8%. It represents about 45% of the firm’s revenue
The quarterly decline in revenue growth was due to lower-than-expected numbers in its other two major business lines – consulting and infrastructure. The consulting business saw revenue decline by about 1% to $5.15 billion, with technology consulting down 4%.
On the earnings call with analysts, Krishna said:
“A pause in discretionary spending is impacting our consulting business. This is due to economic uncertainty, which stems from several temporary factors including geopolitical issues, upcoming elections, and the changing landscape of interest rates and inflation levels.”
Within infrastructure, revenue was down about 9% to $3.0 billion, with IBM Z, its traditional mainframe computer business, seeing a 19% revenue decline.
In the fourth quarter, IBM expects revenue growth to be roughly on par with the third quarter, with low double-digit revenue growth for Software. Consulting revenue should also be in line with the third quarter, as macroeconomic challenges persist.
Buy, Sell or Hold?
Thursday’s selloff presents a solid buying opportunity for IBM stock, which has become one of the top AI stocks on the market.
While the sputtering consulting business is a bit of a concern, IBM’s focus in recent years has turned to its Gen AI and software businesses, where it is consistently growing. It is now the largest segment of its revenue stream, and that share should continue to rise.
IBM expects to have $12 billion in free cash flow at the end of the year, along with about $14 billion in cash – which the CEO said is its best cash position through nine months in years. That will help it further invest in AI.
“We continue to reposition our portfolio towards a higher growth, higher margin business that is well-positioned to address client needs around hybrid cloud and Artificial Intelligence,” Krishna said on the earnings call.
IBM is trading at 25 times earnings and 21 times forward earnings, which is below the S&P 500 and Nasdaq averages – and a lot cheaper than other AI stocks.
Analysts are somewhat mixed on the stock, as IBM has a median price target of $235, which would be 8% higher than the current price.
I would expect to see steady growth for IBM, fueled by its continued growth in AI and a bounce back in its consulting business as inflation settles and rates come down.
IBM has great long-term potential in the niche it has carved out, so buying in on a dip like this is worth considering.