IBM Stock Drops 18% After Earnings Miss as Infrastructure Revenue Falls

TLDR

• IBM stock dropped 18% in premarket trading to $238 after preliminary Q2 earnings missed analyst targets
• Revenue came in at $17.2 billion vs. the $17.9 billion analysts expected
• Adjusted EPS of $2.93 missed the $3.01 estimate
• CEO Arvind Krishna blamed the infrastructure business, saying results were “worse than expectations”
• HSBC downgraded IBM to Reduce; Morgan Stanley kept Equal Weight with a $293 price target

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IBM released preliminary second-quarter earnings on Tuesday that missed Wall Street’s targets, sending the stock down 18% in premarket trading to $238.

International Business Machines Corporation, IBM

The company expects to report $17.2 billion in revenue for the quarter, falling short of the $17.9 billion analysts had forecast. Adjusted earnings are projected at $2.93 per share, below the $3.01 estimate.

CEO Arvind Krishna addressed shareholders directly, pointing to the infrastructure segment as the culprit. IBM had already flagged that infrastructure revenue would dip in the low-single digits for the year, but the actual outcome was sharper than the company anticipated.

“What played out was worse than our expectations,” Krishna wrote.

Krishna said customers made a sudden shift in spending at the end of June, moving quarterly budgets toward servers, storage, and memory products to get ahead of expected price hikes tied to supply-constrained infrastructure. IBM saw some of that coming — just not the scale of it.

“We did not anticipate the magnitude of the capex reprioritization,” Krishna added.

Breaking down the revenue picture: software grew 5%, consulting revenue was flat, and infrastructure revenue dropped 7%. That infrastructure drop is what did the damage.

Wall Street Reacts

The miss drew a swift response from analysts. HSBC cut its rating on IBM to Reduce, flagging concerns that the stock had gotten ahead of its fundamentals.

Morgan Stanley took a softer line, raising its price target to $293 but keeping an Equal Weight rating. The firm noted that strong Q2 infrastructure results may already be priced in.

Despite the reaction, IBM’s free cash flow generation remains a relative strength. The company has used that cash to pay dividends, buy back stock, and invest in new technology areas. That gives it some cushion.

The Bigger Picture for IBM

IBM carries a heavy debt load, and its underlying revenue growth has been slow. That combination leaves little room for execution missteps or a tougher rate environment.

Year-to-date, IBM stock was already down 0.74% before Tuesday’s premarket drop. The stock has a current market cap of around $270.3 billion.

The infrastructure segment has long been a drag on IBM’s growth story. The company has spent years trying to shift its revenue mix toward higher-margin software and services. Tuesday’s numbers show that work is ongoing.

Software was the one bright spot in the preliminary results, with a 5% revenue increase. Consulting came in flat, which at least avoided a decline.

IBM is expected to report full second-quarter results later. The S&P 500 futures were down around 0.2% at the time of IBM’s premarket drop — meaning IBM was falling far harder than the broader market.

HSBC’s downgrade to Reduce puts it among the more bearish voices on IBM heading into the full earnings report.