What Triggered a 25% Fall in IBM Shares On Tuesday?
IBM reported preliminary second quarter revenue of $17.2 billion, lower than consensus estimates of $17.9 billion. Its Adjusted Earnings Per Share (EPS) of $2.93 was also lower than expectations of $3.01.
CEO Arvind Krishna attributed the miss to weakness in the software and infrastructure business, as client budgets shifted to purchase of more hardware such as memory chips.
Krishna also acknowledged that IBM failed to move “quickly enough” and as a result, deals failed to close within the timelines the company had anticipated.
The 25% fall on Tuesday resulted in IBM wiping out nearly $70 billion in its market capitalization.
IBM’s results “will deliver a devastating blow to software/services stocks as investors will worry about the capex pivot negatively impacting the whole industry,” wrote Adam Crisafulli, founder of Vital Knowledge.
In response to IBM’s fall, the US-listed shares of Indian IT services companies (ADRs), Infosys and Wipro, fell 4% and 3% respectively. Shares of other software-oriented companies, Accenture, Salesforce, Microsoft, Cognizant, Autodesk, also declined between 1.5% to 3%.
Indian IT’s Outperformance In July
The Nifty IT index is the second-best sectoral gainer so far in the month of July with a 9% advance.
Companies such as TCS and HCLTech have both reported results for the June quarter so far. While TCS’ results were largely in-line with subdued expectations, HCLTech’s results were not as bad as feared. LTM’s management has also expressed optimism on the company’s growth and margin outlook for the second half of the year.
While most TCS analysts continued to bet on the stock for the longer term, analysts tracking HCLTech issued downgrades, as they cautioned that the growth outlook does not justify a valuation premium for the stock in comparison to its peers such as Infosys and TCS.
Companies such as Wipro and Tech Mahindra will be reporting their results on Thursday, July 16, while Infosys will be reporting numbers next week.
Shares of Infosys, HCLTech and TCS are all up between 8% and 9% so far in July, while those of Tech Mahindra and Wipro are up between 4% to 6%.
Gains on the Nifty IT in July so far have been led by the Midcap names, with Persistent Systems rising over 18% and LTM gaining 15% despite some cautious analyst commentary after its results.
