IBM Stock Is Tumbling Because Software Revenue Disappointed

For the quarter, IBM (ticker: IBM) reported revenue of $20.4 billion, down 6% (or 8% when adjusted for currency and divested businesses) and below the Wall Street analyst consensus forecast of $20.6 billion. Non-GAAP profits were $2.07 a share, ahead of the Street consensus view for $1.79 a share. The company also said it expects to return to top-line growth in 2021.

Morgan Stanley analyst Katy Huberty says disappointing software sales have triggered new concerns about the health of IBM’s business. She points out in a research note that the $6.8 billion in revenue reported for IBM’s cloud and cognitive software business segment in the quarter missed her expectations by $640 million, due to a combination of “difficult comps from a year ago, weaker transaction-processing-software sales, and a shift to shorter duration deals.”

She adds that “the fact that core IBM software growth has deteriorated since Red Hat closed raises questions of whether the deal cannibalizes some IBM software sales.” And she says that a shift to shorter-duration deals raises questions about whether customers are willing to commit to IBM products longer term.

“We believe a material shift in the...software growth trajectory is key to building investor confidence in sustainable revenue growth long-term which is the key objective of new CEO Arvind Krishna.” Huberty maintains her Equal Weight rating and $140 price target on the stock.

Evercore ISI analyst Amit Daryanani, who has an In Line rating and $135 target on the stock, also pointed to the disappointing software results. In a research note, he also observes that the company’s free-cash-flow forecast for 2021—the company projects a range of $11 billion to $12 billion—was below Street expectations. IBM expects 2022 cash flow to range from $12 billion to $13 billion. “While the long-term model laid out by IBM is positive, investors (and us) would like to see some of these levers showing up in the near-term performance in [the form] of revenue stability,” he writes.

UBS analyst David Vogt reiterates his Neutral rating on IBM shares, trimming his price target to $122 from $125. He also finds the software results disappointing. He finds that the earnings beat reflected better-than-expected results in the hardware-focused Systems segment and a lower tax rate. “IBM’s refocus on hybrid cloud is off to a choppy start as Cloud and Cognitive fell well short of expectations, despite 17% constant currency revenue growth at Red Hat,” he writes. Vogt writes that the report suggests that the transformation of IBM’s business is not yet complete.

Credit Suisse analyst Matthew Cabral keeps his Outperform rating on IBM shares, but concedes that it remains a work in progress. “Q4 results were a setback and a reminder there’s still meaningful work to be done on the turnaround,” he writes. “Looking ahead, we remain firm in our view that IBM’s opportunity in a hybrid-first world is meaningfully underappreciated and undervalued at these levels, with the planned spinoff easing the path to sustained growth and, ultimately, a re-rating for the stock.”

IBM stock is down 10.6%, to $117.71.

Write to Eric J. Savitz at eric.savitz@barrons.com