Why IBM Stock Is Sinking Today

International Business Machines (IBM 1.44%) stock is losing ground Thursday despite posting a better-than-expected first-quarter report yesterday. The company’s share price had fallen 7.5% as of 12:15 p.m. ET amid the backdrop of a 1.2% gain for the S&P 500 (^GSPC 0.74%) and a 1.8% jump for the Nasdaq Composite (^IXIC 1.26%).

IBM beat sales and earnings expectations and reiterated solid guidance for the year. But sales for the company’s consulting segment came in lower than expected, and that’s dampening some of the enthusiasm surrounding the stock as an artificial intelligence (AI) play.

IBM stock falls, even as software segment drives Q1 beats

IBM posted non-GAAP (adjusted) earnings per share of $1.60 on sales of $14.54 billion in the first quarter. The performance came in significantly better than the average Wall Street analyst targets, which had called for per-share earnings of $1.43 on revenue of $14.39 billion.

Sales were up 0.6% year over year in the period, with growth for the company’s Red Hat business helping to power a 7% year-over-year sales increase for the software segment. On the other hand, consulting segment revenue fell 2%, and infrastructure revenue fell 6%.

What’s next for IBM?

IBM is targeting sales between $16.4 billion and $16.75 billion for the second quarter, with management expecting annual growth of at least 4% on a currency-adjusted basis. Management also reiterated guidance for sales growth of roughly 5% this year and maintained guidance for free cash flow of $13.5 billion.

IBM’s Red Hat division has been posting encouraging growth and helping to lift the software segment, but some signs of softness in consulting could suggest that AI tailwinds in the segment are coming in softer than anticipated. The company’s massive enterprise customer base could help it tap into AI-related consulting demand, but it’s not driving growth right now.