Wall Street’s mixed reactions to IBM’s Q2 results: Keep holding or cash out?

International Business Machines Corp. (NYSE: IBM) unveiled its Q2 2024 earnings after markets closed for trade on Wednesday. The earnings surpassed Wall Street expectations, yet eliciting mixed reactions from analysts.

IBM Q2 earnings & outlook

IBM’s second-quarter GAAP EPS stood at $1.99, outperforming expectations by $0.19, indicative of the company’s cost management and operational efficiency.

The total revenue for the quarter reached $15.8 billion, which represents a year-over-year increase of 1.9% and a beat by $180 million against analyst expectations.

This revenue increase was supported by a notable growth in software sales, which were reported at $6.74 billion, a 7% increase from the previous year.

This segment’s growth is primarily driven by strong performance in transaction processing platforms, showcasing IBM’s solid footing in high-demand technology areas.

In contrast, consulting revenue slightly declined, clocking in at $5.18 billion, slightly below expectations. However, it was noted that consulting bookings remained strong, suggesting potential for future revenue growth.

The infrastructure segment reported revenues of $3.65 billion, reflecting modest growth and demonstrating resilience in IBM’s legacy sectors.

In terms of profit margins, the gross profit margin under GAAP was 56.8%, an improvement of 180 basis points, while the operating (Non-GAAP) profit margin was even higher at 57.8%, up by 190 basis points.

Free cash flow also showed positive momentum, with the company reporting a free cash flow of $2.6 billion for the quarter, marking a $0.5 billion increase year-over-year.

This increase is critical as it supports IBM’s strategic investments and shareholder returns in the form of dividends.

On the operational front, CEO Arvind Krishna highlighted the role of enterprise AI and IBM’s growing book of business in generative AI, which has now expanded to more than two billion dollars.

This surge is attributed to the launch of WatsonX one year ago, signaling IBM’s aggressive push into AI-driven solutions.

Regarding future guidance, IBM management raised their expectations for the full-year free cash flow to more than $12 billion, buoyed by the first-half performance and operational efficiencies.

Revenue growth expectations were maintained, aligning with IBM’s mid-single digit model in constant currency terms, although foreign exchange rates are anticipated to present a one to two-point headwind.

Mixed reactions from analysts

Despite these robust figures, the sentiments among analysts remain divided. Bank of America’s Wamsi Mohan acknowledged a “mixed” quarter, highlighting overperformance in Software and Infrastructure while pointing out underperformance in Consulting.

Mohan reiterated a Buy rating with a $209 price target.

Similarly, Morgan Stanley’s Erik Woodring described the quarter as solid on the surface but expressed concerns about the underperformance in IBM’s growth vectors like RedHat and Consulting.

Woodring maintained an Equal-Weight rating with a $182 price target.

Jefferies analyst Brent Thill also noted the mixed nature of the results, where high-margin software sectors outperformed but were offset by weaker consulting business segments. Thill adjusted his price target to $200, maintaining a Hold rating.

On July 9^th analysts at Goldman Sachs commented on IBM’s “compelling risk-reward” profile, observing that the industry faces a cyclical correction influenced by IT spending constraints and a shift toward AI-focused capital expenditures.

The firm maintains a Buy rating with a $200 price target on IBM, reflecting confidence in its long-term fundamentals amidst current challenges.

IBM’s strategic maneuvers

On the strategic front, IBM continues to make significant moves, such as the acquisition of HashiCorp, aimed at enhancing its capabilities in multi-cloud infrastructure automation technology.

This acquisition, however, is under antitrust review, showing the complex regulatory landscape IBM navigates.

The company’s leadership, under CEO Arvind Krishna, has been pivotal in steering IBM through these turbulent times. Krishna’s focus on hybrid cloud and AI has been instrumental in IBM’s strategy.

In the broader context, IBM’s venture into quantum computing and its implications for future growth cannot be overlooked.

IBM’s developments in this area suggest a potential for substantial revenue streams from new technologies, although the practical applications and revenue contributions of quantum computing remain in nascent stages.

Now, let’s see what the charts have to say about the stock’s price trajectory, and whether the current market conditions and IBM’s strategic initiatives align to form a compelling investment thesis.

Bullish confirmation only above $200

After remaining rangebound in the $120-$140 narrow range for almost four years, IBM’s stock finally broke above that range in late 2024.

Since then it has remained in an uptrend on the long-term charts despite the drop it saw in April after reporting its Q1 numbers.

IBM chart by TradingView
The stock is currently trading close to its multi-year highs it made in March this year. After today’s up move the short-term bullish momentum remains strong. However, selling can be witnessed once again once the stock approaches the $200 mark.

Hence, bulls looking to initiate fresh long positions must only initiate a small position at current levels and add more to their position if the stock gives a daily closing above $199.

Traders who are bearish on the stock must refrain from shorting the stock at current levels and must wait for weakness to emerge. If after today’s move, the stock fails to cross above $200 in the coming days that will indicate weakness.

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