After first-quarter earnings and a $6.4 billion cloud computing acquisition, IBM (NYSE: IBM) shares fell on Thursday. The findings were good, but IBM investors wanted more AI. IBM shares fell 9.6% at midday ET.
IBM's hectic day The earnings report first. Annual first-quarter revenue grew 1.5% to $14.5 billion. That's a rounding error from analyst estimate of $14.6 billion. Adjusted EPS rose 24% to $1.68 per diluted share. The average analyst would have accepted $1.60 per share. Overall, a good print.
Management boosted its full-year financial estimate from three months ago. Remember, that means single-digit revenue growth and $12 billion in free cash flow in 2024.
IBM will buy HashiCorp for $35 per share in an all-cash, $6.4 billion deal. HashiCorp monitors and automates several cloud platforms. The acquisition has been accepted by both firms' boards of directors and is expected to completion by the end of the year. It still needs regulatory and shareholder clearances.
IBM expects HashiCorp's services to synergize with its hybrid cloud computing platforms, designed around the 2019 $34 billion Red Hat takeover.
Buy news? Big Blue's market cap fell $14 billion on Thursday, more than quadruple HashiCorp's. Though HashiCorp's shares only rose 5% today, it rose more than 20% two days ago as rumors circulated about an IBM merger.
Wall Street expected the HashiCorp takeover, so the announcement wasn't surprising. The earnings report was strong, as you witnessed. However, IBM's stock fell today. The price drop makes sense for two reasons. Last night's report began with IBM's shares up 47% over the previous 52 weeks. Just good outcomes weren't enough to maintain momentum.
Second, investors worry about IBM's revenue shifts. Software sales rose 6% but currency-adjusted consulting revenue was flat. However, IBM's AI consultancy backlog has grown from "the low hundreds of millions" two quarters ago to over $1 billion. Despite the company's AI efforts, the backlog will take years to turn into revenue and financial gains.
Impatient investors favor short-term profits than long-term ambitions. I think IBM is constructing a long-term AI machine, thus price reductions like this are purchasing opportunities. The company trades at 2.5 times sales and 12 times free cash flow, a bargain relative to other AI market darlings.