IBM faces securities fraud probe after 25% stock drop on revenue miss

Bleichmar Fonti & Auld LLP launched a securities fraud investigation into International Business Machines Corp. on July 22 after the stock plunged 25% in a single session.

The law firm said investors may have relied on IBM's "projected Software and Infrastructure segment growth rates and stability" before the company disclosed preliminary second-quarter results that missed estimates, according to a statement from BFA Law.

IBM on July 14 warned that Q2 revenue would come in at $17.2 billion, up just 1% from a year earlier and about $660 million below the $17.85 billion consensus. The company also guided operating non-GAAP earnings per share to $2.93, below the $3.02 estimate. Chief Executive Officer Arvind Krishna acknowledged the company had "faltered," citing clients shifting spending, cybersecurity issues, and deals slipping later than planned.

The sell-off erased more than $60 billion in market value, pushing IBM's market capitalization to about $204 billion. The stock closed at $217.07, its lowest level in years, and now trades at 18.27 times trailing earnings, a discount to the sector median of 26.11 times.

The investigation centers on whether IBM management painted an overly optimistic picture of its deal pipeline before the surprise warning. Multiple law firms announced probes on the same day, and a securities class action lawsuit is expected to follow.

IBM's Q1 results had shown relative strength, with earnings per share of $1.91 topping the $1.81 consensus and revenue of $15.9 billion beating expectations. But net income fell 78% from a year earlier to roughly $1.2 billion, and operating cash flow dropped 61% to $5.17 billion.

The company still has catalysts on the horizon. IBM has struck an artificial intelligence partnership with Alphabet Inc.'s Google Cloud, deepened its ties with OpenAI through a cybersecurity program, and unveiled a sub-1-nanometer chip design. Analysts remain cautiously optimistic — a group of 22 analysts rates the stock a "Moderate Buy" with an average price target of $297.77, implying about 41% upside from current levels. Wedbush's Dan Ives and Barclays' Raimo Lenschow both see the stock reaching $350.

IBM is scheduled to report full second-quarter results on July 22 after the market close. The outcome will test whether the preliminary warning was a one-time stumble or the start of a deeper trend.

This article is for informational purposes only and does not constitute investment advice.