IBM's stock falls as investors struggle to shake off July earnings miss

By Nora Redmond

Shares in International Business Machines declined 5% in premarket trading.

Shares in International Business Machines declined on Thursday as investors struggled to get past the technology company's previous weak set of financial results.

IBM's stock (IBM) fell 5% in premarket trading to $238.85, with shares down about 15% since the start of the year.

While the Armonk, N.Y., company posted better-than-expected earnings for the third quarter, the market still looked to the group's preliminary release in mid-July that signaled profit and revenue had both missed analysts' forecasts in the previous quarter, driven by a shortfall in the company's z17 mainframe program performance.

IBM reported revenue of $17.1 billion in the three months ended in September, up 4.7% from this time last year and higher than the Wall Street consensus of $16.82 billion, according to the London Stock Exchange Group. It posted earnings per share of $2.95, higher than the consensus estimate of $2.86.

The tech giant maintained its expectation of revenue growth for the full year of between 4% and 5% but raised its free-cash-flow forecast from a previous target of approximately $1 billion to a new target of $1 billion-plus.

Jefferies analyst Brent Thill referred to IBM as a "show-me story in the third quarter with a lowered bar." But he said he thinks expectations have now normalized after the miss in the second quarter.

Revenue proved particularly strong in the company's software unit, which saw revenue grow 8% on a year-on-year basis to $7.8 billion, topping projections of $7.66 billion, per LSEG data. The strong performance in the segment can partially be attributed to the successful closure of about two-thirds of the large deals that had become delayed last quarter, Jim Kavanaugh, chief financial officer at IBM, said during the company's earnings call on Wednesday.

Infrastructure revenue increased 4% to $3.71 billion in the three-month period from a year before.

"A software and infrastructure-driven beat gave us the slipped deal recovery we were hoping for as IBM looks well positioned to benefit from secular tailwinds next year," analysts at JPMorgan, headed by Brian Essex, wrote in a Thursday note. "We are encouraged by the recovery in the quarter and see room for multiple expansion as IBM is well positioned as a substantial AI infrastructure beneficiary."

-Nora Redmond

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