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Why IBM Stock Just Sank 6.5%

By Rich Smith – Updated Oct 20, 2020 at 11:41AM

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Cloud computing revenue grew in Q3, but that's not what investors are looking at.

What happened

International Business Machines (IBM 0.68%) reported its fiscal Q3 2020 earnings after close of trading Monday. IBM stock is down 6.5% in response as of 11 a.m. EDT today despite nailing the analysts' consensus earnings target, and surpassing it on revenue.

Expected to earn $2.58 per share, IBM matched that on a pro forma basis. It beat the consensus estimate of $17.5 billion in revenue, at $17.6 billion.

Chalboard drawing of arrow going down labeled down

Image source: Getty Images.

So what

While IBM beat estimates, its revenue still declined by 2.6%. Although that wasn't a lot, it was the company's third straight quarter of declining sales.

Earnings calculated according to generally accepted accounting principles (GAAP) didn't come close to matching the company's headline pro forma number. GAAP profits from continuing operations were only a diluted $1.89 per share. But this was a $0.02 improvement (1.1%) over last year's Q3 number.

Now what

This was a good news/bad news kind of a quarter, but investors' reaction, a 6.5% sell-off, seems pretty unequivocally bad. 

On the one hand, IBM declined to give earnings guidance for the current fiscal fourth quarter. Viewed in the context of the three straight quarters of revenue declines, that surely makes investors nervous. Wall Street commentary on the results is far from encouraging, with Morgan Stanley calling IBM "a 2022 stock," and Citigroup warning that IBM is "getting even more complex" in the absence of guidance and the presence of a spinoff, reports

On the other hand, after spinning off its managed infrastructure services business sometime next year, IBM will be doubling down on cloud computing and artificial intelligence. The company calls this a $1 trillion market opportunity, and it's also the single IBM division that grew in Q3, with sales rising 6.7% and gross profit margins of 77.1%.

That might actually be a positive for IBM.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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