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IBM stock declined sharply in pre-market trade on October 23, dropping more than 6.5% after the firm announced growth in its main cloud software business had slowed. The setback has raised fears about the technology behemoth's potential to fully cash in on the current AI and cloud computing boom.
Even after bumping up its revenue outlook for the fiscal year, the stock response highlighted how much investor faith relies on AI-driven expansion. Slowing in IBM's hybrid cloud operation, which is based around its Red Hat business, severely impacted sentiment. Expansion within the business fell to 14% from 16% in the prior quarter, marking a downturn in growth in what many see as IBM's most attractive division.
J.P. Morgan analysts said IBM's software performance and guidance are more significant than its other businesses because they are more importantly weighted by their increased earnings contribution and market value. They warned that IBM will require a resumption in software growth to continue to post strong overall results, particularly with the company dealing with intense competition from cloud and AI competitors.
IBM shares currently fetch a forward 12-month P/E of 23.85, significantly above Accenture's 17.95, as investors remain optimistic that has perhaps just come under stress from slowing software growth.
All was not gloom in IBM's most recent report. The firm's infrastructure unit, which encompasses its mainframe business, posted a 17% increase in revenue to $3.56 billion, aiding IBM to beat Wall Street expectations both for sales and profit in the third quarter.
Also, Evercore ISI analysts pointed to IBM's acquisition strategy as a possible growth catalyst. With a strong balance sheet and excellent free cash flow, IBM's integration of its $6.4 billion HashiCorp deal, ongoing throughout the year, can reinforce its hybrid cloud business and long-term competitiveness.
Though IBM's recent results indicate stability in infrastructure and robust M&A pipeline, the cloud slowdown triggers concerns about execution across its most important growth driver. In order to maintain investor confidence, IBM needs to show more rapid uptake of AI-based solutions and drive software performance to catch up with increasing industry expectations in the next few quarters.
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