Yahoo Finance

Well for more reaction to IBM's third quarter earnings, going to bring in now Jim Kelleher, director of research at Argus Research. Jim, it is good to see you. So, listen, IBM reports were down about four and a half percent, uh, Jim. Sales disappointed, looks like consulting business flat, but walk me through what you made of the report. What's your your take here, Jim?

Right. Good afternoon. So, uh, what I would say about the report is yeah, the revenue was a little light and that's the instant reaction. It is worth keeping in mind that this long time lagging stock was up about 42% year to date. Its peer group is up considerably less. And finally, investors seem to believe that, uh, uh, Intel, I'm sorry, that IBM is getting AI right. And if they think they've had a lot of good things to say about that. But I guess right now investors are just going through the numbers. You had good growth in the software side. Uh, it's worth noting that consulting has been negative for them, as it's been for Accenture and Cognizant, everyone else in that space for a while. So just to get to flattish not bad. I think the downside surprise was probably on the equipment side, the infrastructure business. Uh, so that's where I would say, uh, you got the, the softness in revenue. But you also as a result of the being less hardware, more software, a little better consulting performance, you got a nice uptake in gross margin year-over-year. So it's a better mix overall. And I think when people, uh, you know, go through the numbers, it won't seem so dire.

You mentioned AI. So let's drill into that, Jim. It looks like bookings for AI consulting and software have exceeded 3 billion since mid 2023, the company is saying. I'm just curious, when you talk to clients, Jim, do you argue, listen, IBM is a smart way to play that mega AI trend?

Well, I think they're, they're really getting the AI story together. For a long time, the company spoke of hybrid cloud and when like a year ago when they were talking about AI, like every other company, it seemed like a little bit like vaporware. But specifically at the think event, they talked about their granite models that are really, you know, Arvind, Arvind, the CEO's strategy is that companies, enterprises are going to begin with a large general purpose AI model, but when they want to hone down to their own business, they're going to need specified models that are going to work for their enterprise. And that's where the granite modeling comes in. And, uh, these, these LLMs look like they're, they're impressive and tolerable and plug and play to some extent. So, you know, generally, I think their cloud strategy and their AI strategy is now kind of working in concert.

You know, you're right, Jim, to bring up. The stock might be down here in the after hours, but what a run for IBM this year. I mean, heading into this print, it was up about 40%. Given that run though, Jim, how would you think about valuation for this name at these levels?

You know, because the stock has been kind of a chronic underperformer over the years, you know, you could say the stock is trading at something like, you know, 22 times on its, on its annual estimate, maybe 21 on next year, maybe even a little less. Now that is above the five-year PE, but again, it's been a very depressed stock. But that's, that's a market PE for a stock that has a potential for growth here. And the earnings did grow a little bit, you know, again, a little disappointment on the top line, but I think that's addressable and we'll see how that goes going forward.

Jim, great to have you on the show. Appreciate that instant analysis. Thank you.

Thank you.