International Business Machines Corp (NYSE: $IBM) is one of the largest IT companies worldwide, operating in over 170 countries. It is best known for its software and hardware products, including servers, storage systems, and networking hardware.
On Wednesday, April 24, after markets closed, IBM released the first quarter fiscal 2024 results to a negative market reaction.
IBM’s First Quarter Results
In the first quarter, IBM reported sales of $14.46 billion, a gain of 1% and 3% on an FX-neutral basis, missing estimates of $14.5 billion. Its non-GAAP EPS came in at $1.68, an increase of 24% and above estimates of $1.59.
Net income for the quarter came in at $1.6 billion, a gain of 69% compared to $927 million the previous year. The GAAP gross profit margin came in at 53.5%, up 80 basis points, and a 54.7% operating profit margin on a non-GAAP basis, up 100 basis points.
Its pre-tax profit margin remained flat at 7.4% and went up 130 basis points to 11.5% on a non-GAAP basis.
Net cash from operations came in at $4.2 billion, a $0.4 billion from the previous year, while free cash flow came in at $1.9 billion, up $0.6 billion Y/Y. In the past 12 months, it generated $14.3 billion in net cash from operations and $11.8 billion in free cash flow. It returns $1.5 billion to shareholders via dividends in Q1.
Mixed Segment Performance
In the first quarter, Software, its best-performing segment, saw revenue rise 5.5% and 5.9% on an FX-neutral basis to $5.9 billion. The Consulting segment saw revenue remain relatively flat, declining 0.2% and up 1.7% on an FX-neutral basis to $5.2 billion.
The Infrastructure segment saw revenues drop by 0.7% and rise 0.2% on an FX-neutral basis to $3.1 billion. Lastly, the Financing segment saw revenues decline 1.6% and 1.5% on an FX-natural basis to $0.2 billion.
IBM to Acquire HashiCorp
In its Q124 results, IBM revealed that it plans to acquire HashiCorp for $6.4 billion or $35 per share, a 42.6% premium on HashiCorp’s Monday closing price. The acquisition is part of a strategic move by IBM to expand into the cloud-based software industry and tap into the rising AI-powered demand.
The deal represents IBM’s largest acquisition since it acquired Red Hat, a software firm, for $34 billion in 2019. It is part of CEO Arvind Krishna’s strategy to transform IBM from a legacy hardware company into a high-growth services and software company. In 2023, the company acquired Apptio for $4.6 billion and divested its weather, health, and managed infrastructure businesses.
Commenting on the HashiCorp acquisition, IBM’s CFO Jim Kavanaugh said they would use the “Red Hat playbook.” It will entail pushing HashiCorp’s product suite to its global customer base. HashiCorp’s free cash flow margin is expected to rise 30%-40% in the first year.
IBM’s Software segment has continued to shine as the Consulting segment has seen revenue remain flat amid cautious spending by companies due to rising interest rates.
The HashiCorp deal is expected to be concluded by the end of fiscal 2024, subject to regulatory approval.
Fiscal 2024 Guidance
IBM reiterated its previous guidance of mid-single-digit growth in revenue in fiscal 2024, with a headwind of around 1.5%-2% due to FX rates. It expects a free cash flow of $12 billion at the end of fiscal 2024.
IBM Stock Performance
Following the worse-than-expected performance of its Consulting segment, IBM shares saw a 9.89% decline during the pre-market trading session to $165.90 per share as of 9:03 AM EDT on Thursday, April 25, 2024. The decline held during the regular trading session, with the stock down 8.26% to $168.90 as of 09:33 AM EDT.
Before the decline, IBM shares were up 13.99% year-to-date, compared to the 5.39% gain of SPX’s Technology sector index in the same period. The stock closed 1.05% high on Wednesday at $184.10 per share. In the past 52 weeks, the shares had seen a 44.99% gain compared to the 22.64% gain of the SPX. The last closing price is just below the 52-week high of $199.18 and above the 52-week low of $120.55.
IBM stock closed trading on Wednesday just below the 50 DMA of $188.14 and significantly above the 200 DMA of $161.43.
Analysts’ Forecast
12 stock analysts give IBM stock an overall hold rating. They forecast a broad price range with a high of $220 and a low of $125. Based on Wednesday’s closing price, their average price forecast of $192.58 is a 4.61% upside.
Should You Add IBM to Your Portfolio?
The advent of cloud computing greatly affected IBM’s legacy hardware business. However, the company has reinvented itself and is starting to see growth once more. The rise of AI has boosted the company, generating over $1 billion in bookings for its AI products since mid-2023, with sequential quarterly growth.
While AI growth is encouraging, investors should not get too excited, especially given the company’s forecast of mid-single-digit revenue growth in fiscal 2024. Consequently, analysts’ hold rating accurately represents the company’s performance in the medium term.
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