IBM's quarterly results beat market expectations. Why did the stock collapse?

Software and server company IBM reported revenues and profits above market expectations, but the company's shares fell sharply. Neither a stable outlook nor growth in key segments could dispel investors' concerns about the possible impact of artificial intelligence on its business, Bloomberg notes.

In its first-quarter financial report, IBM reported revenue growth of 9% to $15.9 billion, beating Wall Street forecasts by 1.2%. Adjusted earnings were $1.91, beating market expectations by 5%, according to FactSec data cited by Barron's. Net income jumped 15% to $1.22 billion.

The software segment brought in 11% more than the same quarter last year at $7.05 billion, slightly ahead of Street Account analysts' forecast, CNBC reported.

IBM-acquired Linux operating system developer Red Hat posted 13% growth. However, the pace slowed due to weak federal customer activity and supply chain issues, explained IBM CFO Jim Cavanagh.

Infrastructure segment revenue added 15% to $3.33 billion, helped by a 51% jump in enterprise server sales, CNBC noted.

IBM reiterated its outlook for 2026: it expects revenue growth of more than 5 percent and an increase in free cash flow of about $1 billion. Cavanagh explained the restraint in estimates: he said the company has historically not revised its annual guidance at the end of the first quarter.

Despite the strong results, IBM shares collapsed by 11% in trading on April 23, but then recovered some of the losses and ended the session down 8.3%. Since the beginning of the year, the company's securities value has fallen by 22%, while the S&P 500 index has risen by 3.8% over the same period.

The key disappointment for the market was the software segment, which did not show outperformance, analysts said. "Investors were hoping for stronger results from the software business," Jefferies' Brent Till said in an interview with Bloomberg. He said Wall Street fears that clients may be put off buying from IBM by testing competitors' AI solutions.

"Investors don't like forecasts that match expectations," explained the drop in IBM's stock price to Melius Research analyst Ben Reitzes, whose opinion is quoted on Barron's.

UBS also said the full-year forecast, which matched expectations, does not allay long-term concerns about the risks to the company's software business amid AI developments.

Goldman Sachs and Bank of America confirmed their recommendations to buy IBM shares after the report. Goldman simultaneously worsened its target price from $365 to $335, but the lowered target suggests a significant upside of 45%.

IBM has transformed itself into a fast-growing software company with major acquisitions of Red Hat in 2019, HashiCorp in 2025 and Confluent in 2026. The new focus has made it a target for investors worried that artificial intelligence tools will replace many existing software products, Bloomberg writes.

In February, the company's stock suffered its steepest stock drop in 26 years after AI startup Anthropic unveiled a tool that it said could modernize an outdated programming language used by IBM.

This article was AI-translated and verified by a human editor