IBM: Should Investors Buy the 25% Crash in the Stock or Stay Away?

IBM (NYSE: IBM) had one of the worst days in its long and storied history, with the stock crashing 25% on Tuesday after the company pre-announced disappointing second-quarter results. While the first instinct for many investors is to buy the dip, I would not be running out to buy shares right away. The poor report puts the company in the artificial intelligence (AI) loser bucket, and that has been a tough label for stocks to shake.

For Q2 (preliminary), IBM said its revenue edged up 1% year over year to $17.2 billion, well below the $17.86 billion consensus, as compiled by FactSet. Consulting revenue was flat on the quarter, while infrastructure revenue sank 7%. Software revenue, meanwhile, rose 5%. Red Hat was once again a bright spot, with revenue climbing 11%. Adjusted earnings per share (EPS) rose 5% to $2.93. However, it also fell short of the $3.01 analysts had expected.

Image source: The Motley Fool.

IBM's mainframe business struggles

IBM blamed the miss on its z17 mainframe business. The company had expected a low-single-digit decrease in the business as it lapped its launch from last year, but the decline was much worse than expected. It said that customers shifted their spending away from mainframes and toward supply-constrained areas like servers, memory, and storage before expected price hikes.

IBM said it had expected some customer reprioritization of capital expenditure (capex) spending, but not of the magnitude it experienced. IBM also added that its customers appeared "distracted" by the constantly evolving cybersecurity landscape throughout the quarter.

The company said that, ultimately, the shortfall was largely driven by numerous large deals failing to close on time. However, it did not say that these deals would be completed in the current quarter (Q3), nor did it reiterate its full-year guidance. As such, whether the issue is just about deals being pushed back or a broader slowdown in demand remains a big question left unanswered.

Why it's best to stay on the sidelines with IBM stock

If the AI boom has taught me one thing, it's that when a stock or sector gets branded as an AI loser, it becomes very difficult to shed that label. There are many stocks in the software-as-a-service (SaaS) sector that have continued to put up solid revenue growth quarter in and quarter out, only to see their stocks continue to drift lower. IBM could find itself in a similar situation, as it has a large software business and its mainframe business has lost steam.

If the company could make strides in quantum computing, it could spur a rally, but right now, this also doesn't appear to be the case, with HSBC analysts noting that it has only about $100 million in quantum computing orders over the past five quarters versus over $600 million for IonQ. As such, with no catalyst in sight, I'd stay on the sidelines.

HSBC Holdings is an advertising partner of Motley Fool Money. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FactSet Research Systems, International Business Machines, and IonQ. The Motley Fool recommends HSBC Holdings. The Motley Fool has a disclosure policy.