Why is IBM stock down 5% despite Q3 earnings beat?
IBM shares fell more than 5% during premarket trading on Thursday despite the technology company reporting better-than-expected third-quarter earnings and revenue.
The company posted adjusted earnings of $2.95 per share, beating analyst estimates of $2.86, while revenue reached $17.10 billion against expectations of $16.82 billion.
Revenue grew about 5% from a year earlier, according to a company statement.
Net income increased to $2.19 billion, or $2.30 per share, from $1.74 billion, or $1.84 per share, in the same quarter last year.
IBM said it expects full-year free cash flow to increase by more than $1 billion, improving on its July forecast for an increase of approximately $1 billion.
The company maintained its outlook for 2026 constant-currency revenue growth of 4% to 5%.
The stock initially surged in after-hours trading before reversing course during the earnings call, as investors weighed management's comments about corporate spending on artificial intelligence.
A jump in oil prices also weighed on broader market sentiment.
Krishna warns enterprises are scrutinising AI returns
Chief Executive Officer Arvind Krishna said large corporate customers were becoming more conscious of the returns they were receiving from their AI investments.
"I think what we are seeing is that at least larger enterprises are becoming a lot more cognizant and a lot more aware of what the true ROI of all of their AI spend is. They are also getting worried if some of the AI spending is completely out of control with no real return," said Arvind Krishna, Chief Executive Officer, IBM.
Krishna stressed that the productivity benefits of artificial intelligence remained significant, even as customers assessed whether their spending was delivering tangible results.
But the way I have always characterized it is, there is no question to us, and this is the advice I give every C-suite member that I meet, that what we are trying to give people on AI, the productivity, the advantages of AI, the way it is going to change work, is very real. Let me not make any confusion around that.
Arvind Krishna, CEO, IBM
IBM shares had tanked after its second-quarter earnings in July, when Krishna attributed disappointing performance to customers shifting spending towards AI-related hardware, including servers, storage and memory, amid concerns about supply constraints and potential price increases.
The stock is down 14% this year.
Software revenue growth forecast raised
IBM's software business delivered stronger-than-expected results, with revenue rising 8.3% to $7.80 billion, above analyst estimates of $7.62 billion.
Sales in its hybrid cloud unit increased 11%, while transaction processing software revenue rose 9%, recovering from an unexpected decline in the previous quarter.
Chief Financial Officer James Kavanaugh told Reuters that delayed software deals that had unsettled investors in the second quarter were beginning to close.
IBM now expects annual software revenue growth of about 7% to 8%, compared with its previous forecast of 6% to 8%.
Kavanaugh said about 25% of transaction processing revenue came from deals deferred from the second quarter, while "the remaining 75% is net new business".
Infrastructure revenue increased 4.2% to $3.71 billion, supported by 31% growth in distributed infrastructure, which includes servers and storage systems.
That growth offset weakness in IBM's Z mainframe business.
The improved software outlook and higher free cash flow forecast offered support for IBM's operating performance, although Krishna's comments highlighted the growing scrutiny of AI investment returns across the enterprise technology sector.