Why IBM Stock Is Plummeting Today

Key Points

• IBM stock is sinking Thursday even though the company published better-than-expected quarterly results yesterday.

• Sales and earnings topped Wall Street's expectations in Q2, but software revenues fell short of expectations.

• IBM is seeing some clients adopt a cautious approach in signing new deals due to geopolitical dynamics.

• 10 stocks we like better than International Business Machines ›

IBM (NYSE: IBM) stock is moving lower on Thursday despite the company posting better-than-expected quarterly results. The tech stalwart's share price was down 8% as of 11:15 a.m. ET. Shares had been down as much as 10.1% near the start of today's trading.

IBM published its second-quarter results after the market closed yesterday, and actually delivered results that came in significantly better than Wall Street had anticipated. The company also raised its full-year guidance for free cash flow (FCF), but softness in the company's Q2 software numbers is causing investors to move out of the stock.

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IBM stock sinks as software revenue misses expectations

IBM reported non-GAAP (generally accepted accounting principles) adjusted earnings per share of $2.80 on revenue of $16.98 billion in the second quarter -- a performance that came in far better than the average analyst estimate's call for adjusted earnings of $2.64 per share on sales of $16.59 billion. The company's revenue was up 8% year over year in the period, and earnings per share were up roughly 18% compared to the prior-year period.

While the company's Q2 report looked strong overall, investors are concentrating on a performance shortfall in the software segment. Category revenue climbed 10% year over year to reach $7.39 billion, but the average analyst estimate had called for sales of $7.39 billion in the period. The software business's gross margin of 83.9% also fell slightly short of the average analyst estimate's target for a gross margin of 84% in the period.

What's next for IBM?

With its latest quarterly report, IBM reiterated guidance for sales growth of at least 5% on a currency-adjusted basis this year. Management also said that it now expects to generate more than $13.5 billion in FCF this year -- up from its previous target for FCF of roughly $13.5 billion.

CEO Arvind Krishna said that geopolitical uncertainty is causing some clients to take a more cautious approach to new contracts, and the sales shortfall for the software segment that's central to the company's growth and standing in the artificial intelligence market is causing some investors to lose confidence in the stock. On the other hand, the company's Q2 numbers looked pretty solid overall, and it's possible that recent unevenness on the contract front will smooth out with time.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines. The Motley Fool has a disclosure policy.