Shares of IBM (IBM 0.62%) took a hard hit on Thursday, following the release of first-quarter results and the announcement of a $6.4 billion acquisition in the cloud computing space. The results were solid enough, but IBM investors wanted a stronger artificial intelligence (AI) push. As a result, IBM shares traded 9.6% lower at noon ET.

IBM's busy day

Let's start with the earnings report. First-quarter sales rose 1.5% year over year, landing at $14.5 billion. That's a rounding error away from the consensus analyst projection of $14.6 billion. On the bottom line, adjusted earnings increased by 24% to $1.68 per diluted share. Here, your average analyst would have settled for $1.60 per share. All in all, that's a solid print.

Management doubled down on the full-year financial forecast it provided three months ago. As a reminder, that means single-digit revenue growth with free cash flow of roughly $12 billion in 2024 as a whole.

Meanwhile, IBM is buying HashiCorp for $35 per share, an all-cash deal with an enterprise value of $6.4 billion. HashiCorp specializes in monitoring and automation of cloud computing operations across multiple cloud platforms. Expected to close before the end of the year, the deal has been approved by both companies' boards of directors but still needs the usual range of regulatory and shareholder approvals.

IBM expects HashiCorp's services to unlock synergies with its hybrid cloud computing platforms, built around the $34 billion Red Hat buyout in 2019.

Buy the news?

Big Blue's market cap lost more than $14 billion of value on Thursday, or more than double HashiCorp's price tag. HashiCorp's stock only gained roughly 5% today, but the stock jumped more than 20% two days ago as the rumor mill started speculating about an IBM deal.

In the end, Wall Street saw the potential HashiCorp acquisition coming and the announcement wasn't much of a surprise. And as you saw earlier, the earnings report was robust. Yet, IBM's stock price plunged today.

The price drop makes sense for two reasons.

  • First, IBM entered last night's report on a full head of steam, and the stock had gained 47% over the preceding 52 weeks. Merely solid results weren't enough to keep that momentum going.
  • Second, some investors worry about the way IBM's revenue streams are shifting. Currency-adjusted consulting revenue was flat year over year while software sales increased by 6%.

That being said, IBM's backlog of AI-related consulting contracts now stands at more than $1 billion, up from "the low hundreds of millions" two quarters ago. The company's AI muscles are flexing, but it will take some time before the backlog is converted into paid-up revenue and cash profits.

Investors are often impatient, preferring quick results over long-term profit plans. In my eyes, IBM is building a valuable AI machine for the long haul, and price drops like this one should be seen as buying opportunities. After all, the stock trades at merely 2.5 times sales and 12 times free cash flow today -- a bargain compared to the expensive market darlings you see elsewhere in today's AI market.