International Business Machines Corp. was the worst loser on the Dow Jones Industrial Average for the day as its shares dropped 6.6% on Thursday after the company’s quarterly earnings the day before. However, other analysts argue that it’s not yet time to panic.
Analysts at Melius Research wrote in a research note late Wednesday, “Deep breath, it’s just a first quarter,”
They further stated: “It’s more than OK: 1Q is always IBM’s ‘worst’ of the year, due to its seasonal patterns – and IBM beat this time.”
They said that decreasing sales patterns for IBM’s (IBM) open-source software division Red Hat, which they claimed generates over 10% of IBM’s revenue, could be the cause of the stock decline following the first-quarter results, which exceeded Wall Street’s expectations. They suggested that the decline might possibly have been caused by a decline in demand for IBM’s consulting business.
Red Hat’s bookings, a measure of software demand, were, they said, trending higher than revenues. The so-called Department of Government Efficiency, or DOGE, is attempting to drastically reduce the size of the federal government, and they claimed that IBM was far less vulnerable than its competitors.
“We are buyers on weakness since IBM is still entering a big mainframe cycle this quarter, software is set to accelerate from here with improvement from Red Hat and guidance for flat consulting revenues seems reasonable,” the analysts stated.
IBM unveiled the Z17 mainframe this month, claiming it is “engineered for the AI age.”
Amid worries that global trade frictions may prevent businesses from spending more on technology as they become more apprehensive about the economy, company executives said on Wednesday that IBM’s clients haven’t yet modified their purchasing patterns.
However, on IBM’s results call, Chief Executive Arvind Krishna stated that short-term uncertainty “may cause clients to pause and take a wait-and-see approach.” Additionally, he cautioned that IBM’s consulting services were more vulnerable to arbitrary withdrawals.
Following President Donald Trump’s broad-based tariffs that target numerous nations, most notably China, markets have erupted. IBM, however, stuck to its full-year cash flow and revenue projections.
In light of this, data from BondCliQ revealed that Thursday’s IBM bond flows were mixed, with afternoon buying coming after selling. According to the BondCliQ figure below, IBM has a large number of outstanding bonds.
In an SEC filing earlier this year, IBM said that it had secured numerous debt-securities agreements. The agreements’ joint bookrunning managers are BNP Paribas Securities Corp., Barclays Capital Inc., Deutsche Bank Securities Inc., and RBC Capital Markets.
GimmeCredit analyst Dave Novosel noted in a note issued Thursday that IBM increased its debt by $7 billion in the first quarter to finance its February acquisition of cloud software provider HashiCorp. “The increase in debt pushed core leverage to 3.5x,” he stated. “However, considering that free cash flow is likely to exceed $7 billion this year, we expect some debt reduction as the year goes on, taking leverage toward 3x.”
In 2025, IBM’s stock is up 4.3% while the S&P 500 index’s SPX is down 7%.
