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IBM Selloff an Overreaction?

ARMONK, N.Y. ( TheStreet) -- With heavy hitters like Wal-Mart (WMT), JPMorgan Chase (JPM) and Citigroup (CITI) among IBM's major customers, the tech giant's third-quarter revenue miss raised concerns about a domestic IT spending slowdown.

But closer inspection reveals Big Blue saw 4% revenue growth in its U.S. business, which is the company's largest market, and that European sales grew 8% year over year. Overall, revenue from major markets was flat on a constant currency basis, and IBM's main area of weakness was Japan, where revenue fell 10% year over year.

IBM reported its third-quarter results after market close on Monday

Investors, used to strong outperformance from IBM, pushed the bellwether's stock down $10.04, or 5.35%, to $176.55 on Tuesday. That reaction looks a bit harsh based on the slightness of the shortfall, but IBM usually delivers a strong beat on the top line, and the stock's year-to-date gain of nearly 30% showed expectations were high ahead of the report.

"Investors have grown accustomed to healthy revenue upside from [IBM] as highlighted by the $1.3 billion sales beat in the second quarter of 2011," explained Brian White, an analyst at Ticonderoga Securities, in a note released on Tuesday.

White also noted that the company's systems and technology revenue declined 4% sequentially and grew just 3.6% year over year, its slowest growth since the second quarter of 2010.

"Core server line performance bears watching going forward," added Krista Macomber, a research analyst at Technology Business Research (TBR). [This is] driven more by macroeconomic concerns than any misfirings in IBM's core strategy, which remains solid."

The impact of slowing hardware sales on key IBM component supplier Intel (INTC - Get Report), however, should be minimal. While revenue from Big Blue's system z mainframes declined 5% year over year, sales of its system x servers, which are based on Intel chips, was steady, growing 1% over the same period.

As for specific industry sectors, IBM's revenue from its financial services customers was up 10% year over year, beating its overall sales growth of 8%.

Loughridge, however, acknowledged that financial services spending is more robust in "growth markets" such as Brazil, Russia, India and China. "We see a very strong book of business growing in a very rapid rate in margin and profit opportunities for us that are very powerful," he said.
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