IBM shares fall as results fail to offset broader tech worries

International Business Machines Corp shares fell in premarket trading on Thursday as better-than-expected sales growth failed to to offset broader concerns about the tech sector amid a broad retreat from riskier assets.

The shares slumped more than 5% in premarket trading as US stock futures slid, with Nasdaq 100 contracts leading the decline. IBM has declined 15% this year through Wednesday’s close.

The latest round of corporate reports is testing whether earnings can keep the AI trade on track amid mounting concerns that heavy spending on data centers and computing capacity will take longer to generate returns.

The bar is high, with even Meta Platforms Inc. falling in premarket trading despite showing evidence that its investments are starting to pay off.

IBM’s sales increased about 5% to $17.1 billion in the quarter ended 30 September, IBM said Wednesday in a statement. IBM’s infrastructure unit, which includes mainframe servers, expanded 4% to $3.7 billion. Both were ahead of analysts’ average projections, according to data compiled by Bloomberg.

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Consulting revenue, however, came in below analysts’ estimates, suggesting companies are diverting more money to toward AI infrastructure and memory storage at the expense of other technology, Bloomberg Intelligence analysts Anurag Rana and Josh Christensen wrote in a note.

That “may provide the clearest evidence yet that AI is beginning to crowd out parts of enterprise IT spending”, they wrote.

On Wednesday, IBM told investors that the company had recovered most of the infrastructure deals that were delayed earlier this year. Chief financial officer Jim Kavanaugh said in an interview that about two-thirds of the mainframe and associated software deals that slipped earlier this year have since been inked.

In July, IBM said that customers were temporarily shifting their spending to chips and servers amid AI-fueled shortages, harming its mainframe and software units.

This fueled panic among investors already concerned that artificial intelligence tools will disrupt many software incumbents and sent the shares down 25%, the worst day since at least 1968.

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Read: ‘We faltered’: IBM plunges most since at least 1968 on miss

IBM’s closely watched software unit expanded 8.3% to $7.8 billion, ahead of the $7.64 billion anticipated by Wall Street. Big Blue has sought to refashion itself as a high-growth software company through major acquisitions of Red Hat, HashiCorp and Confluent.

For the full year, the company now expects free cash flow to increase by more than $1 billion. Previously, it expected about $1 billion. Profit, excluding some items, was $2.95 a share in the third quarter, compared with the average estimate of $2.86.

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