IBM (IBM) Stock Plunges 5% on Sales Miss, Q3 Results Seen as a Setback

Shares of IBM (NYSE: IBM) are down 5% in pre-open Thursday after the company reported lower-than-expected sales for its third quarter.

IBM reported Q3 EPS of $2.52, slightly ahead of the analyst estimate of $2.50. Revenue for the quarter came in at $17.6 billion versus the consensus estimate of $17.77 billion.

“With the separation of Kyndryl early next month, IBM takes the next step in our evolution as a platform-centric hybrid cloud and AI company," said Arvind Krishna, IBM chairman and chief executive officer.

“We continue to make progress in our software and consulting businesses, which represent our higher growth opportunities. With our increased focus and agility to better serve clients, we are confident in achieving our medium-term objectives of mid-single digit revenue growth and strong free cash flow generation.”

Stifel analyst David Grossman reiterated a Buy rating and a $151.00 per share price target on IBM despite a Q3 sales miss. In addition, the analyst also believes investors have a lack of confidence in IBM’s ability to execute and sustain growth in the software segment.

“Software growth is improving; however, IBM legacy products continue to be down MSD. There are factors that support better software growth, but they require improving execution and the stock is likely to remain range bound pending better visibility on software growth improving (ex Red Hat). We have lowered 4Q and 2022 estimates to reflect the spin and lower GBS margins but acknowledge our numbers may need refining. Our SOTP supports value (with Kyndryl) in a range of $140-$170 but requires improving execution,” Grossman said in a client note.

Credit Suisse analyst Matthew Cabral reiterated an Outperform rating but lowered the price target by $4.00 to $172.00 as Q3 results are seen as a setback.

The analyst outlined two positives from the quarter: (1) Strengthening GBS momentum, and (2) High-teens Red Hat growth. On the other hand, four drawbacks include: (1) GM pressure, (2) GTS disruption, (3) Weak Systems, and (4) SW declines ex-RHT.

“Following a positive analyst day in early October, 3Q results were a setback as it underscores “core” IBM’s need to earn its post-spin multiple. That said, we liked the GBS + Red Hat momentum and continue to believe IBM’s opportunity in a hybrid-first world is meaningfully underappreciated and undervalued at these levels; execution remains key,” Cabral wrote in a note sent to clients.

Shares of IBM closed at $141.90 yesterday.

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