Dj International Business Machines Corp. Stock Rises Friday, Still Underperforms Market

A month has gone by since the last earnings report for IBM (IBM). Shares have added about 1.8% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is IBM due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

IBM’s Q3 Earnings Beat, Revenues Miss Despite Solid Demand

IBM reported relatively healthy third-quarter 2024 results, with adjusted earnings beating the Zacks Consensus Estimate but the top line missing the same.

The company witnessed healthy demand trends for hybrid cloud and artificial intelligence (AI) solutions with a client-focused portfolio and broad-based growth. It remains on track to reach its targets for 2024. However, despite solid AI traction, IBM’s quarterly performance was dented by a pause in discretionary spending owing to economic uncertainty due to geopolitical issues, upcoming elections and the evolving landscape of interest rates and inflation levels.

Net Income

On a GAAP basis, net loss from continuing operations was $317 million or a loss of 34 cents per share against a net income of $1.71 billion or $1.86 per share in the year-ago quarter. The significant decline in GAAP earnings was attributable to a non-recurring $2.7 billion pension settlement charge related to the transfer of a portion of the company's pension obligations and related plan assets to a third-party insurer.

Excluding non-recurring items, non-GAAP net income from continuing operations was $2.30 per share compared with $2.20 in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 3 cents.

Quarter Details

Quarterly total revenues increased to $14.97 billion from $14.75 billion on strong demand for hybrid cloud and AI, driving growth in the Software segment. On a constant currency basis, revenues were up 2% year over year. The top line, however, missed the consensus estimate of $15.19 billion.

Gross profit improved to $8.42 billion from $8.02 billion in the prior-year quarter, resulting in respective gross margins of 56.3% and 54.4% owing to a strong portfolio mix. Total expenses increased to $9.22 billion from $6.15 billion due to a one-time pension settlement charge.

Segmental Performance

Software: Revenues improved to $6.52 billion from $5.95 billion, driven by growth in Hybrid Platform & Solutions, Red Hat, Automation and Transaction Processing. The segment’s revenues beat our estimate of $6.48 billion on solid hybrid cloud traction. Segment profit was $1.97 billion compared with $1.72 billion in the year-ago quarter for margins of 30.2% and 29%, respectively. The company is witnessing healthy hybrid cloud adoption by clients and solid demand trends across RedHat, automation and generative AI offerings like watsonx.

Consulting: Revenues were $5.15 billion compared with $5.18 billion a year ago as clients prioritized spending and pulled back on discretionary projects. The segment’s revenues missed our estimate of $5.19 billion. Segment profit declined to $559 million from $566 million for margins of 10.9% each.

Infrastructure: Revenues were $3.04 billion compared with $3.27 billion on lower demand for hybrid and distributed infrastructure, reflecting product cycle dynamics. Segment profit was $422 million compared with $490 million in the year-ago quarter, owing to higher investments in the business across areas like AI, hybrid cloud and quantum, for respective margins of 13.9% and 15%.

Financing: Revenues declined to $181 million from $186 million a year ago. Segment profit was down to $86 million from $91 million in the year-ago quarter for respective margins of 47.5% and 49.2%.

Cash Flow & Liquidity

During the quarter, IBM generated $2.88 billion in cash from operations compared with $3.05 billion in the year-ago quarter, bringing the respective tallies for the first nine months to $9.11 billion and $9.47 billion. Free cash flow was $2.06 billion in the quarter, up from $1.68 billion in the prior-year period, driven by higher profit and working capital efficiencies. As of Sept. 30, 2024, the company had $13.2 billion in cash and cash equivalents with $52.98 billion of long-term debt.

Outlook

For full-year 2024, the company reiterated its revenue growth expectations in the mid-single digit on a constant currency basis. Free cash flow is expected to be in the vicinity of $12 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, IBM has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, IBM has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Zacks Investment Research

The top headline in the semiconductor industry this week was the latest quarterly earnings report from artificial intelligence (AI) chip market leader Nvidia , which traded mixed on Thursday after Q3 results that once again surpassed expectations. Analysts responded positively to Nvidia's results, with most on Wall Street reading the quarterly report as a resoundingly bullish signal for strong AI demand going forward.

NVDA stock set a new high above $152 after earnings before paring gains, and is up about 191% in 2024. Meanwhile, its top rival Advanced Micro Devices remains on negative ground for the year as 2024 draws to a close, down 6% on a year-to-date basis.

Why is AMD Stock Underperforming?

While AMD is up more than 4,800% over the past decade, the shares have failed to impress investors this year. Declining revenues in its gaming and embedded segments have offset enthusiasm over strength in its data center segment, and the company has invested heavily in acquisitions as it attempts to compete with Nvidia in the AI chip market.

As a result, AMD is looking to cut costs, and the stock fell recently on news that the chip specialist plans to trim its workforce by 4%.

While equity benchmarks have rallied to new record highs this month amid broad-based post-election optimism, AMD is down 39% from its year-to-date highs, set in March. But after a “rebuilding” year of strategic investments in AI, should investors consider buying the dip in AMD stock?

For Immediate Release

Chicago, IL – November 22, 2024 – Zacks.com announces the list of Stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Adobe ADBE, Microsoft MSFT, International Business Machines IBM and Alphabet GOOGL.

Here are highlights from Thursday’s Analyst Blog:

3 Reasons to Buy Adobe Stock Despite -19% Selloff

Adobe shares have declined 19.4% in the trailing 12 months, underperforming the broader Zacks Computer & Technology sector’s return of 32.9% and the Zacks Computer Software industry’s appreciation of 16.9%.

ADBE suffers from a challenging macroeconomic environment, which has negatively impacted the Digital Media segment, and intensifying competition in the generative AI (Gen AI) space.

However, Adobe’s prospects are expected to benefit from a strong demand for its creative products. Its Creative Cloud, Document Cloud and Adobe Experience Cloud products have been driving top-line growth.

ADBE’s strong positioning in the digital content and marketing industry, backed by its robust cloud-enabled products and growing GenAI capabilities, has been boosting its business prospects.

Rising subscription revenues and solid momentum across the mobile apps are major positives. Growth in emerging markets and robust online video creation demand remain tailwinds for Adobe.

For the fourth quarter of 2024, Adobe expects net new Annual Recurring Revenues in the Digital Media segment to be $550 million. Subscription revenues of Digital Experience are anticipated between $1.23 billion and $1.25 billion.

Expanding GenAI-Powered Portfolio Aids ADBE’s Prospects

Adobe is riding on the solid momentum in its family of creative, Gen AI models, namely Firefly. It has been used to generate 13 billion images since March 2023 and is seeing rapid adoption by leading brands and enterprises.

Its unveiling of the Firefly Image 2 Model, Firefly Vector Model and Firefly Design Model to mark a significant advancement in its creative Gen AI model family, enhancing creative control, image quality and illustrator capabilities, is a major positive.

Adobe recently introduced the new Firefly Video model, which is a positive. With Firefly innovations and integrations, ADBE has exceeded 12 billion generations since the launch of Firefly. This is marked as an important milestone.

Enhanced AI Assistant to Boost ADBE’s Competitiveness

Adobe enhanced features of Acrobat AI Assistant to allow customers to ask questions, get insights, and create content from information across groups of PDFs and other document types, including Microsoft Word, PowerPoint and text files. It also introduced enhanced meeting transcript capabilities in AI Assistant.

Adobe’s growing efforts to expand content creation in Adobe Acrobat are noteworthy. It integrated Adobe Firefly image generation into its Edit PDF workflows. It has optimized AI Assistant in Acrobat to generate content fit for presentations, emails and other forms of communication.

Adobe also offers the Adobe Express Platform AI Assistant, which is capable of answering technical questions, automating tasks, simulating outcomes and generating audiences seamlessly.

The launch of Generative Remove in Adobe Lightroom, a powerful Firefly-backed tool that helps remove unwanted objects from any photo in a single click in a non-destructive manner, is a plus.

The introduction of Adobe Express for Enterprise, powered by Firefly Image Model 3, is driving the company’s momentum among various enterprises.

Strong Clientele Drives ADBE’s Growth

A solid portfolio and differentiated approach to AI are attracting an expanding universe of customers across Adobe’s segments.

International Business Machines is one of the notable customers leveraging Adobe Firefly.

Adobe’s other key customer wins include Johnson & Johnson, Mayo Clinic, Home Depot, Dentsu, TD Bank, Newell Brands, Alphabet’s Google, MediaMonks, Meta Platforms, U.S. Navy, PepsiCo, Estee Lauder, Disney, RedBull, Amazon, KPMG, U.S. Treasury Department and Charles Schwab.

These factors are expected to drive top-line growth. For the fourth quarter of fiscal 2024, Adobe projects total revenues between $5.50 billion and $5.55 billion.

Adobe expects Digital Media revenues between $4.09 billion and $4.12 billion. The Digital Experience segment’s revenues are expected between $1.36 billion and $1.38 billion.

Adobe expects non-GAAP earnings between $4.63 per share and $4.68 per share.

ADBE’s 2024 Estimate Revision Trend Positive

For 2024, the Zacks Consensus Estimate for earnings is pegged at $18.28 per share, up by a penny over the past 60 days. The figure indicates 13.75% year-over-year growth.

The Zacks Consensus Estimate for 2024 revenues is pegged at $21.44 billion, suggesting 10.46% growth over 2023.

The consensus mark for fourth-quarter fiscal 2024 earnings is currently pegged at $4.66 per share, unchanged over the past 60 days. The figure suggests 9.13% year-over-year growth.

The consensus mark for fourth-quarter 2024 revenues is pegged at $5.54 billion, suggesting 9.71% year-over-year growth.

Adobe Inc. price-consensus-chart | Adobe Inc. Quote

ADBE Stock Trades at a Premium

However, Adobe stock is not so cheap, as the Value Score of D suggests a stretched valuation at this moment.

In terms of the forward 12-month Price/Sales, ADBE is trading at 9.27X, higher than the industry’s 7.86X.

Conclusion

Adobe’s deepening GenAI focus and innovative GenAI-powered portfolio presents a compelling opportunity for investors. We believe ADBE’s strong growth prospect justifies its premium valuation.

ADBE currently has a Zacks Rank #2 (Buy), which implies that investors should start accumulating the stock right now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.

Zacks Investment Research

Adobe ADBE shares have declined 19.4% in the trailing 12 months, underperforming the broader Zacks Computer & Technology sector’s return of 32.9% and the Zacks Computer Software industry’s appreciation of 16.9%.

ADBE suffers from a challenging macroeconomic environment, which has negatively impacted the Digital Media segment, and intensifying competition in the generative AI (Gen AI) space.

However, Adobe’s prospects are expected to benefit from a strong demand for its creative products. Its Creative Cloud, Document Cloud and Adobe Experience Cloud products have been driving top-line growth.

ADBE’s strong positioning in the digital content and marketing industry, backed by its robust cloud-enabled products and growing GenAI capabilities, has been boosting its business prospects.

Rising subscription revenues and solid momentum across the mobile apps are major positives. Growth in emerging markets and robust online video creation demand remain tailwinds for Adobe.

For the fourth quarter of 2024, Adobe expects net new Annual Recurring Revenues in the Digital Media segment to be $550 million. Subscription revenues of Digital Experience are anticipated between $1.23 billion and $1.25 billion.

ADBE Lags Sector, Industry in a Year

Expanding GenAI-Powered Portfolio Aids ADBE’s Prospects

Adobe is riding on the solid momentum in its family of creative, Gen AI models, namely Firefly. It has been used to generate 13 billion images since March 2023 and is seeing rapid adoption by leading brands and enterprises.

Its unveiling of the Firefly Image 2 Model, Firefly Vector Model and Firefly Design Model to mark a significant advancement in its creative Gen AI model family, enhancing creative control, image quality and illustrator capabilities, is a major positive.

Adobe recently introduced the new Firefly Video model, which is a positive. With Firefly innovations and integrations, ADBE has exceeded 12 billion generations since the launch of Firefly. This is marked as an important milestone.

Enhanced AI Assistant to Boost ADBE’s Competitiveness

Adobe enhanced features of Acrobat AI Assistant to allow customers to ask questions, get insights, and create content from information across groups of PDFs and other document types, including Microsoft MSFT Word, PowerPoint and text files. It also introduced enhanced meeting transcript capabilities in AI Assistant.

Adobe’s growing efforts to expand content creation in Adobe Acrobat are noteworthy. It integrated Adobe Firefly image generation into its Edit PDF workflows. It has optimized AI Assistant in Acrobat to generate content fit for presentations, emails and other forms of communication.

Adobe also offers the Adobe Express Platform AI Assistant, which is capable of answering technical questions, automating tasks, simulating outcomes and generating audiences seamlessly.

The launch of Generative Remove in Adobe Lightroom, a powerful Firefly-backed tool that helps remove unwanted objects from any photo in a single click in a non-destructive manner, is a plus.

The introduction of Adobe Express for Enterprise, powered by Firefly Image Model 3, is driving the company’s momentum among various enterprises.

Strong Clientele Drives ADBE’s Growth

A solid portfolio and differentiated approach to AI are attracting an expanding universe of customers across Adobe’s segments.

International Business Machines IBM is one of the notable customers leveraging Adobe Firefly.

Adobe’s other key customer wins include Johnson & Johnson, Mayo Clinic, Home Depot, Dentsu, TD Bank, Newell Brands, Alphabet’s GOOGL Google, MediaMonks, Meta Platforms, U.S. Navy, PepsiCo, Estee Lauder, Disney, RedBull, Amazon, KPMG, U.S. Treasury Department and Charles Schwab.

These factors are expected to drive top-line growth. For the fourth quarter of fiscal 2024, Adobe projects total revenues between $5.50 billion and $5.55 billion.

Adobe expects Digital Media revenues between $4.09 billion and $4.12 billion. The Digital Experience segment’s revenues are expected between $1.36 billion and $1.38 billion.

Adobe expects non-GAAP earnings between $4.63 per share and $4.68 per share.

ADBE’s 2024 Estimate Revision Trend Positive

For 2024, the Zacks Consensus Estimate for earnings is pegged at $18.28 per share, up by a penny over the past 60 days. The figure indicates 13.75% year-over-year growth.

The Zacks Consensus Estimate for 2024 revenues is pegged at $21.44 billion, suggesting 10.46% growth over 2023.

The consensus mark for fourth-quarter fiscal 2024 earnings is currently pegged at $4.66 per share, unchanged over the past 60 days. The figure suggests 9.13% year-over-year growth.

The consensus mark for fourth-quarter 2024 revenues is pegged at $5.54 billion, suggesting 9.71% year-over-year growth.

Adobe Inc. Price and Consensus

Adobe Inc. price-consensus-chart | Adobe Inc. Quote

ADBE Stock Trades at a Premium

However, Adobe stock is not so cheap, as the Value Score of D suggests a stretched valuation at this moment.

In terms of the forward 12-month Price/Sales, ADBE is trading at 9.27X, higher than the industry’s 7.86X.

Price/Sales Ratio (F12M)

Conclusion

Adobe’s deepening GenAI focus and innovative GenAI-powered portfolio presents a compelling opportunity for investors. We believe ADBE’s strong growth prospect justifies its premium valuation.

ADBE currently has a Zacks Rank #2 (Buy), which implies that investors should start accumulating the stock right now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zacks Investment Research