IBM stock tumbled Thursday after the computing giant reported a mixed first quarter, dampening recent excitement about the 112-year-old firm's AI potential. IBM also announced plans for a $6.4 billion acquisition of cloud-software company HashiCorp.
In an earning release published late Wednesday, IBM says that it earned an adjusted $1.68 per share on sales of $14.46 billion for the March-ended quarter. The earnings topped analyst consensus expectation for $1.60 per share, according to FactSet. But the sales were a tick lower than the $14.53 billion analysts expected.
Meanwhile, the tech giant announced a plan to acquire HashiCorp for $6.4 billion, or $35 per share. HashiCorp stock had a market capitalization of about $5 billion before the Wall Street Journal report sent it higher on Tuesday.
On the stock market today, IBM stock lost 8% to close at 169.30. Shares fell below IBM's 21-day and 50-day moving averages, according to MarketSurge.
IBM Outlook For 2024
IBM affirmed its previous full-year guidance for mid-single digit revenue growth for 2024 and $12 billion in free cash flow.
The company's stock has been helped in recent months by its progress in offering AI services. IBM highlighted its AI momentum again on Wednesday. IBM Chief Executive Arvind Krishna said the book of business for IBM's Watsonx AI services surpassed $1 billion.
"We believe our comprehensive AI strategy is well positioned to help clients scale AI," Krishna told analysts Wednesday. "We developed our Watsonx platform for clients to build their AI solutions, spanning from foundation model training to data preparation and governance."
IBM's overall revenue increased roughly 1% year over year in the first quarter. Sales for its software business grew 5.5% year over year to $5.9 billion, Its consulting revenue was flat at $5.2 billion and revenue from its infrastructure business fell just under 1% to $3.1 billion, IBM said.
Following the report, Bank of America analyst Wamsi Mohan reiterated a buy rating for IBM stock. The analyst said the tech giant has an "underappreciated AI portfolio."
But Mohan lowered his price target for IBM stock to 209, from 220, acknowledging a "slower start" to 2024.
How HashiCorp Fits Into IBM's Plans
As for the HashiCorp deal, Krishna said the cloud-software firm fits within IBM's focus of helping enterprise clients manage data across multiple cloud providers.
HashiCorp, Krishna told analysts, has "a proven track record of helping clients manage the complexity of today's infrastructure by automating, orchestrating and securing hybrid and multi-cloud environments."
IBM expects the deal to close by the end of this year. Analysts see the software complementing the hybrid cloud capabilities of Red Hat, the software firm IBM acquired for $34 billion in 2019.
"We view this as a natural asset for IBM to own given its success in operating Red Hat as an open source infrastructure asset," wrote Jefferies analyst Brent Thill in a client note Wednesday. Jefferies maintained a neutral hold rating for IBM stock.
Analysts with William Blair, meanwhile, wrote Wednesday that the deal "makes a lot of strategic sense for both companies, with IBM buttressing its growing infrastructure software portfolio with popular complementary tools (Terraform, Vault), while HashiCorp will gain access to a seasoned go-to-market motion."
In its most recent fiscal year ending in January, HashiCorp recorded $583 million in sales, up 22.5% year over year. The company lost 8 cents per share on adjusted basis, compared to an adjusted loss of 55 cents a year earlier.
IBM Stock: Technical Ratings
Prior to Thursday's slide, IBM shares had gained 13% this year and 46% in the past 12 months.
Coming into the report, IBM stock had an IBD Composite Rating of 81 out of a possible 99, according to IBD Stock Checkup. The score combines five separate proprietary ratings into one rating. The best growth stocks have a Composite Rating of 90 or better.
Further, IBM stock's IBD Relative Strength Rating is 87 out of 99.
Prior to earnings, IBD MarketSurge showed that IBM stock had formed a flat base, with a potential buy point of 199.18.
