By Akriti Shah (Reuters) -IBM shares dropped more than 6.5% before the bell on Thursday, after growth slowed in its core cloud software segment and spooked investors over Big Blue's ability to seize booming demand for cloud services. Despite raising its revenue outlook for the current fiscal year, the pullback in shares reflects the focus on artificial intelligence and cloud services as investors have placed hefty bets on AI-related units, relying on the technology to drive strong levels of growth. Sluggish expansion in IBM's cloud business, housed within the software segment, raised concerns about the company's ability to take advantage of demand for AI, while rivals also tussle for market share. The company's sales growth in the hybrid cloud unit – known as Red Hat – decreased to 14% from 16% in the previous quarter. "IBM's software performance and outlook tend to carry more weight than the rest of the business due to the level of earnings contribution and value the business represents," said J.P. Morgan analysts. Set to lap peak mainframe growth rates next year, IBM will need an uptick in its software performance to sustain overall healthy growth rates, they added. Investor bets on IBM's cloud business and AI adoption have propelled shares to rise about 30% so far this year. The stock trades at a forward 12-month price-to-earnings ratio of 23.85, compared with 17.95 for rival Accenture. The infrastructure segment, which includes IBM's mainframe business, posted a 17% rise in quarterly revenue to $3.56 billion, which helped the company beat third-quarter sales and profit estimates. Some analysts highlighted IBM's acquisition strategy, which could help meet high growth expectations. "M&A also remains an underappreciated lever for the company, which given their strong FCF and balance sheet, could be a material catalyst, given they are well on their way to integrate Hashi transaction," Evercore ISI analysts said. Last year, IBM bought HashiCorp in a deal valued at $6.4 billion. (Reporting by Akriti Shah and Zaheer Kachwala in Bengaluru; Editing by Krishna Chandra Eluri)
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