Big Blue's Wild Wednesday Ride: IBM Crushes Q3 Earnings, So Why Did the Stock Tank Mid-Call?
Key Points
International Business Machines beat third-quarter expectations on both revenue and earnings, initially driving shares 7.3% higher in after-hours trading.
The stock reversed abruptly halfway through the earnings call, dropping to a 4.6% after-hours loss around 5:35 p.m. ET.
CEO Arvind Krishna warned that corporate customers are growing concerned about the real returns on out-of-control AI spending.
If you glanced at a trading chart for International Business Machines (NYSE:IBM) on Wednesday evening, you could be forgiven for thinking someone knocked over a glass of water on the exchange's main server rack.
Big Blue put together an undeniable earnings win, enjoyed a brief bounce into after-hours euphoria, and then promptly fell off a cliff before dinner was even over.
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A picture-perfect quarter on paper
Big Blue delivered a clean performance across the board. Strong System Z sales helped, alongside rampant growth in several software categories. Revenue landed at $17.1 billion, topping consensus expectations of $16.8 billion, while adjusted earnings of $2.95 per share handily beat Wall Street's $2.86 estimate. The top-line figure was a 5.9% increase from the year-ago report while earnings jumped 11% higher.
Ergo, IBM grew sales while widening its profit margins. The stock jumped as much as 7.3% higher in the early after-hours trading.
But just as investors were getting comfortable with IBM's wins, the 5:00 p.m. ET conference call threw a spanner in the narrative. Instead of powering the usual market hype engine, CEO Arvind Krishna offered a surprisingly blunt assessment of enterprise software budgets.
The 5:35 p.m. reality check
The clear signal of AI market trouble landed around 5:35 p.m. ET. In response to an analyst probe on corporate IT budgets, Krishna candidly noted that corporate clients are "getting worried if some of the AI spending [is] completely out of control with no real return."
He added that real implementation requires extensive workflow reengineering: "It is not a little [robotic process automation] tool that you bolt on, and you get something."
IBM's stock plunged at that exact moment. Whee after-hours trading closed, the stock was down 4.ad.
A one-two punch for AI infrastructure
Granted, IBM wasn't working in a vacuum on Wednesday. Tesla (NASDAQ:TSLA) also reported earnings the same night, and Elon Musk's empire also cast a chill across extended trading with its own guidance. Tesla's forecast hinted at cooler data center capital expenditures, weighing on the company's energy business and spooking AI investors.
But Krishna's frank admission threw more fuel on the fire. Infrastructure heavyweights like Nvidia, Oracle, and CoreWeave didn't flinch during Krishna's spoken remarks, but they began bleeding red right around 6:00 p.m. ET -- the exact moment the call adjourned and automated transcript summaries landed in institutional inboxes.
When an industry titan tells you customers are balking at the bill for unproven tech, the rest of the market tends to listen. The reaction is even sharper when two titans issue similar warnings in unison.
Anders Bylund has positions in International Business Machines and Nvidia. The Motley Fool has positions in and recommends International Business Machines, Nvidia, Oracle, and Tesla. The Motley Fool has a disclosure policy.