Key Points
The stock is now down more than 28% year to date.
The earnings miss was due to a severe shift in spending by IBM's customers into AI memory and servers.
IBM (NYSE: IBM) stock fell off a cliff this week. Dropping more than 25% in one day, IBM posted its worst decline in its more than a century-old history, erasing roughly $67 billion in market value.
The horrible day was triggered by an earnings warning from the company, where revenue and growth fell far short of expectations. The question now is whether the short-term trouble could present a longer-term opportunity.
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The reason IBM's earnings fell precipitously is a rotation away from software toward memory and AI servers. There is incredible demand and a constrained supply for AI accelerators and memory chips. IBM's customers reallocated funds accordingly, locking down their hardware needs before prices skyrocket too far. IBM CEO Arvind Krishna admitted the company didn't anticipate the sheer scale of this shift.
Yes, the fall and earnings miss are concerning, but this looks more like a cyclical and timing problem than a long-term issue.
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Is IBM a buy right now?
Wall Street often overreacts, and I believe that's what has happened here. The selloff of IBM has created an opportunity to buy the stock at a discount. However, investors will still need to be patient and ride out this memory-dominated cycle.
I'm cautiously bullish on IBM. The short-term troubles don't negate the fact that just last quarter, IBM reported free cash flow of more than $2 billion and 9% revenue growth. The rest of this year could be tough for IBM, but I don't see the memory buying spree lasting forever.
Because of the stock's crash, IBM is relatively inexpensive right now.
Catie Hogan 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.