IBM will report its third-quarter earnings late Wednesday, with IBM stock having recently pulled back following a breakout.
The 114-year-old tech stalwart's shares are ahead more than 29% overall this year, though much of those gains were focused in the first half of the year. Optimism about IBM's software and other businesses benefiting from AI helped return shares to record-high territory late last year for the first time in more than a decade. IBM has added to those gains but slumped following its Q2 results in July.
Here's what to watch from IBM's Q3 report:
IBM Stock: Q3 Earnings Expectations
IBM's earnings are seen increasing 6% to $2.45 per share on an adjusted basis for the September-ended quarter, according to FactSet. IBM's adjusted earnings increased 15% to $2.90 in the company's June-ended quarter.
Analysts polled by FactSet forecast that IBM will post Q3 revenue of $16.1 billion, up 8% year over year. That would be roughly in line with how fast IBM grew revenue in its previous quarter.
"We expect to see another solid quarter driven by AI demand for the company's diverse offerings while IBM continues to engage in meaningful partnerships across its portfolio," Wedbush analyst Dan Ives wrote to clients late Sunday. He rates IBM stock as outperform with a price target of 325.
Watching Software
IBM's Q2 software segment sales were slightly below expectations, which sent shares lower following the report.
For IBM's Q3, analysts are projecting software sales of $7.2 billion, a 10.5% year-over-year increase.
"Software growth in Q3 will be the single most important metric this quarter after two consecutive quarters of underperformance," Morgan Stanley analyst Erik Woodring wrote in a recent client note.
Woodring has a neutral equal-weight rating for IBM stock. But he said he expects IBM will report that its organic software growth accelerated in the quarter, based on custom trackers for software spending.
Meanwhile, analysts project that IBM's consulting revenue increased 1.7% to $5.2 billion while infrastructure sales grew 13.8% to $3.5 billion. IBM's infrastructure segment includes sales for its recently launched AI-focused z17 mainframe.
IBM Stock: AI Push
IBM's record high earlier this month came after the company announced a partnership with AI startup Anthropic. Anthropic's Claude large language models will be infused into IBM's software portfolio, according to an Oct. 7 announcement from the two companies.
The market reaction to the news underscored the ongoing excitement about AI's ability to drive future growth at IBM.
Evercore ISI analyst Amit Daryanani said in a recent client note that investors will be looking for "(AI) bookings and/or revenue disclosures and details on their partnership with Anthropic." Daryanani rates IBM stock as outperform.
In July, IBM Chief Executive Arvind Krishna said IBM's "AI book of business" had reached more than $7.5 billion at the end of its second quarter, compared to over $2 billion a year earlier.
Any IBM Quantum Updates?
Investors may also be listening for updates on IBM's quantum computing efforts. The tech giant said in June that it is preparing to build the world's first "large-scale, fault-tolerant quantum computer" by 2029.
IBM stock rallied in September following news of a quantum finance trial that boosted the tech giant's shares.
Synovus Senior Portfolio Manager Dan Morgan wrote in an IBM earnings preview that the "quantum era is closer than some may think." And he noted IBM has some advantages, including expertise in hardware and mainframe computer development.
"With the excitement surrounding quantum computing stocks, IBM shares could potentially get a boost if the company is able to develop and communicate a clear roadmap with the introduction of a quantum computer by 2030," Morgan wrote.
IBM Stock's Recent Breakout
In recent trading in the stock market today, IBM stock is up a half-percent at 282.82.
Shares broke out briefly above a 296.16 cup pattern buy point on Oct. 7 to reached a record 301.04, according to MarketSurge. But the stock has pulled back since, finding support just above its 21-day moving average.
IBM — one of 30 stocks that make up the Dow Jones Industrial Average — has easily outperformed the S&P 500. But its Relative Strength rating has slipped to 69 out of a best-possible 99. The stock had a score of 85 three months ago.
