Is IBM Stock in Trouble?

Shares of International Business Machines (NYSE: IBM) plummeted sharply and suddenly last week after the tech giant released news that was concerning to investors. The company didn't formally announce its latest quarterly numbers, but did preannounce them. And the numbers were troubling enough that the stock plunged more than 25%, which is massive for a company of IBM's size.

Are the numbers really that bad and concerning? Here's why investors dumped the stock, whether it's in deep trouble, and if IBM stock may be a good contrarian buy right now.

Image source: Getty Images.

What did IBM preannounce that was so bad?

IBM's second-quarter results aren't due until Wednesday, but it released preliminary figures last week. One huge problem was that the company's latest numbers are a big miss for Q2, with IBM's revenue coming in at $17.2 billion versus analyst estimates of $17.86 billion, and its adjusted earnings per share of $2.93 is also lower than Wall Street's projections of $3.02.

Those are sizable misses for the business, but arguably, not enough to justify a massive sell-off. The company also said that the shortage in memory products is negatively impacting its business. The most concerning development, however, may be the news that customers are spending more on artificial intelligence (AI) servers and memory than on software and IBM's mainframe products. This paints a more concerning picture of the company's future, at least in the near term, which may be weighing the tech stock down heavily right now.

Is IBM's stock cheap enough that it's worth buying?

Whenever a stock falls so suddenly, the question arises of whether the market has overreacted and whether it could have opened up a great buying opportunity. Even if IBM's business is facing some headwinds in the short term, that doesn't mean it won't recover. This is, after all, a top tech company with a robust business. If the stock continues falling, it could soon hit multi-year lows.

At 17 times its estimated future earnings (based on analyst estimates), IBM's stock looks attractively valued. But analysts may also soon update their projections for the business's performance, in light of the company's comments and once the full earnings report comes out this week. There could still be trouble ahead for the stock in the near future.

It may be a good idea for investors to hold off buying the stock today because when it rains, it often pours. It's typically not just one and done when it comes to a sell-off like this, and with the upcoming earnings numbers and guidance likely to feature more concerns, a better move may be to buy the stock after all that comes out, as that will provide a better picture of where the business is heading.

While I don't doubt IBM is still a good buy for the long haul, given how turbulent the stock has been of late, there may not be a need to rush to buy it just yet.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines. The Motley Fool has a disclosure policy.