IBM Stock Takes a Rare Tumble After Earnings: What to Know

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International Business Machines (IBM) stock is notably lower in Thursday's session after the technology giant topped third-quarter profit expectations but came up short of revenue estimates.

In the three months ended September 30, IBM's revenue increased 1.5% year over year to $15 billion, driven by a 9.7% jump in sales in its software segment to $6.5 billion. Its earnings per share (EPS) were up 4.6% from the year-ago period to $2.30.

The results were mixed compared with analysts' expectations. Wall Street was anticipating revenue of $15.1 billion and earnings of $2.23 per share, according to CNBC.

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"Our third-quarter performance was led by double-digit growth in Software, including a re-acceleration in Red Hat," said IBM CEO Arvind Krishna in a statement. "We continue to see great momentum in artificial intelligence as our models are trusted, fit-for-purpose, and lower cost, with performance leadership. Our generative AI book of business now stands at more than $3 billion, up more than $1 billion quarter to quarter."

For the fourth quarter, IBM said it expects revenue growth consistent with the third quarter. The company also reiterated its full-year forecast for more than $12 billion in free cash flow.

Free cash flow is important to investors because companies "can do a number of useful things with it, such as pay dividends, buy back its stock, acquire other companies, expand its business and knock out its debts," writes Kiplinger contributor Will Ashworth on the importance of good cash flow.

And for IBM, specifically, some of its free cash flow is used to consistently pay and grow its dividend. Indeed, IBM is one of the best dividend stocks for dividend growth, having increased its payout annually for the past 29 years.

Is IBM stock a buy, sell or hold?

Even with Thursday's post-earnings slump, IBM has been one of the best Dow Jones stocks in 2024, up 46% for the year to date on a total return basis (price change plus dividends). But Wall Street doesn't think there's much more room to run.

According to S&P Global Market Intelligence, the average analyst target price for IBM stock is $214.85, which represents a discount to current levels. Additionally, the consensus recommendation is a Hold.

Not everyone is on the sidelines, though. Financial services firm Stifel is one of the more bullish outfits on the blue chip stock, as evidenced by its Buy rating and $246 price target.

"IBM has re-rated higher relative to S&P 500 reflecting improving execution, free cash flow growth and the company's defensive characteristics," says Stifel analyst David Grossman. “We believe the risk/reward remains attractive as the stock could continue to re-rate further with consistent software revenue growth (Red Hat, ELA cycle, and HashiCorp acquisition), the upcoming mainframe cycle and continued free cash flow growth."

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Joey Solitro is a freelance financial journalist at Kiplinger with more than a decade of experience. A longtime equity analyst, Joey has covered a range of industries for media outlets including The Motley Fool, Seeking Alpha, Market Realist, and TipRanks. Joey holds a bachelor's degree in business administration.