Should You Buy the IBM Stock Drop?

IBM (NYSE: IBM) stock has shed about 10% of its value since the company reported earnings on April 24. 

That’s a big hit for a tech titan with a $153 billion market cap. 

Of course, we all know IBM isn’t going anywhere. Big Blue is a certified blue-chip stock. It’s also a leading player in the trendy and rapidly expanding AI segment. 

Given that, it doesn’t take much of an imagination to see IBM stock surging back up to the $200 level it teased in March. That would mean a quick 20% return for investors as well as a strong buy-in point for the stock’s $1.67 dividend, which currently yields 4%. 

So should investors be eyeing IBM stock at its current level? 

I think so, and I’ll tell you why…

Why IBM Stock Is Worth a Look

First, we have to look at why IBM stock took such a big hit in the first place. Namely its first-quarter earnings report. 

The company reported adjusted earnings of $1.68 per share and revenue of $14.46 billion. That topped Wall Street forecasts of EPS $1.60 per share but fell short on expected revenue of $14.53 billion.

The softer top line is what really hurt. Overall revenue edged up just 1% year over year, led by a 5.5% expansion in its software business. Unfortunately, consulting revenue was flat at $5.2 billion and revenue from its infrastructure business fell by roughly 1%, to $3.1 billion.

The weakness stands in stark contrast to the company’s fourth-quarter report, which sent IBM stock soaring from $160 per share to $199 in March. That report showed a 3% increase in software revenue, a 5.8% increase in consulting revenue, and a 2.7% improvement in infrastructure sales.

Chief Executive Arvind Krishna attributed the overperformance to growing demand for AI. That was further evidenced by IBM’s WatsonX product bookings, which doubled quarter over quarter.

With so much excitement surrounding the investment potential of AI, investors stampeded in, resulting in that 24% stock surge. However, the company’s tepid first-quarter results told a different story. Hence the fall back to its current level of $166.

Additionally, IBM announced it would pay $6.4 billion to acquire cloud-software firm HashiCorp. 

Strategically, the deal makes perfect sense, as it will complement the hybrid cloud capabilities of Red Hat, which IBM acquired for $34 billion in 2019. That acquisition has paid off, as Red Hat saw its revenue increase 9% in the first quarter, driving growth in IBM’s software division — the lone standout.

The acquisition of HashiCorp, which recorded $583 million in sales last year (up 22.5% year over year) will pay off as well — but not until 2025. In the meantime, the cash burned on the acquisition is money that won’t be put into other growth enterprises, like AI development. 

Still, if you keep a long-term view, the deal’s a net-positive. So, too, is IBM’s exposure to AI. 

Indeed, the company might not be winning the kind of attention Microsoft and Nvidia have garnered, but it’s still formidable. Remember, IBM first helped bring AI mainstream over a decade ago when its supercomputer Watson torched Jeopardy! champion Ken Jennings on the TV show. 

ChatGPT is getting all the headlines now, but IBM’s WatsonX AI business is still a major player in the segment. 

For example, Spanish football team Sevilla FC is using WatsonX to power Scout Advisor — a tool to help the team identify new players. It also recently conducted a successful auditing pilot with Citi.

Initiatives like these have pushed WatsonX’s backlog beyond $1 billion. Overall backlog increased 7% from a year ago in the first quarter. And more opportunities will continue to emerge in the years ahead.

In addition to WatsonX, IBM’s consulting, cloud, and software should all benefit from AI-driven demand. The company’s first-quarter earnings report just led some to believe that those benefits aren’t accruing quickly or dramatically enough.

Of course, outsized expectations are one of the problems that’s accompanied the AI craze. IBM isn’t the first company to fall short of investors’ lofty AI-related expectations and it won’t be the last. But it will be a winner over the long haul, with happy AI surprises along the way.

Disappoints like the one that hampered the company last month are less likely to persist. Which is why IBM still affirmed its previous full-year guidance for mid-single-digit revenue growth in 2024 and $12 billion in free cash flow, despite the setback.

Give the company 6–12 months and IBM stock should be back around $200, delivering a nice gain and strong dividend to forward-thinking investors.

Fight on,

Jason Simpkins

Simpkins is the founder and editor of Secret Stock Files, an investment service that focuses on companies with assets — tangible resources and products that can hold and appreciate in value. He covers mining companies, energy companies, defense contractors, dividend payers, commodities, staples, legacies and more…

In 2023 he joined The Wealth Advisory team as a defense market analyst where he reviews and recommends new military and government opportunities that come across his radar, especially those that spin-off healthy, growing income streams. For more on Jason, check out his editor’s page.

Be sure to visit our Angel Investment Research channel on YouTube and tune into Jason’s podcasts.

Want to hear more from Jason? Sign up to receive emails directly from him ranging from market commentaries to opportunities that he has his eye on. 

@OCSimpkins on Twitter