Although investors had been lowering their expectations for tech sector growth/performance this quarter, IBM (NYSE:IBM) still managed to spook the Street with soft revenue in both hardware and software. The long-term picture for IBM hasn't changed all that much, though it is likely that tech investors are going to be chewing their nails for at least another quarter. In the meantime, while IBM remains a well-run and comprehensive play on technology, the stock still isn't a great bargain.

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Some Weakness was Expected, but not This Much
It wasn't all that surprising that IBM's quarter was soft, as plenty of analysts thought that the hardware business was going to slow down. What was surprising, however, was the magnitude of the weakness.

Revenue fell 5% as reported, or about 2% on a constant currency basis. Services did best, with revenue basically flat on a constant-currency basis. Software was up 3% in constant currency (down 1% reported), but hardware dropped by 12% due to notable weaknesses in mainframes and storage products. Perhaps even worse for investor sentiment, management pointed to a significant slowdown in the month of September.

Although IBM's reported per-share earnings did meet expectations, the real story isn't quite so positive. Gross profit held up pretty well (up about one point on a GAAP basis) despite the revenue shortfall, due in part to the benefits of pruning less-profitable service business. Operating income disappointed, however, on higher SG&A expenses and fell about 7% on an adjusted basis. That IBM met numbers was a function of below-the-line items.

SEE: Understanding The Income Statement

Cycles and Timing Played a Role
Maybe IBM's underlying strength isn't as grim as the numbers in the third quarter would suggest. For starters, it sounds like some software business slipped into the fourth quarter as larger deals encountered some delays.

It's also worth noting that product launch cycles could have led hardware customers to postpone purchases. A new mainframe lineup came too late in the quarter to really help much, and the company likewise has new server and storage products on the way. With that in mind, a rebound in the fourth quarter shouldn't be out of the question so long as the North American macro picture doesn't get even worse from here.

Teasing Out the Trends
Even with the aforementioned potential impact from upcoming launches, some general trends may nevertheless be emerging from IBM's report. Weak server performance won't be good news for Dell (Nasdaq:DELL) or Hewlett-Packard (NYSE:HPQ). Likewise, I'll be curious to see what NetApp (Nasdaq:NTAP) has to say when it reports earnings; if it can't gain share from the likes of IBM, it's harder to support the growth thesis there.

IT services still seems like a solid growth opportunity for IBM, and it looks like the company continues to out-execute the likes of Infosys (Nasdaq:INFY) and HP. I will be curious to see if IBM continues to choose to improve margins at the cost of growth; it's almost certainly a better decision from the perspective of long-term value creation, but shareholders demand growth and management will have to find the point where the two demands balance out.

SEE: A Primer On Investing In The Tech Industry

The Bottom Line
IBM is often underrated as a savvy acquirer, and I doubt that the company is done with the wheeling and dealing. What I do wonder about, is whether the company has any particular desire to add to its hardware business; security appliances, for instance, would seem to be a logical target.

If IBM can continue to grow cash flow at a rate of 4 or 5%, these shares aren't a huge bargain today. A long-term growth rate of 5% would point to a fair value around $205 to $220, making names such as Oracle (Nasdaq:ORCL), Cisco (Nasdaq:CSCO) or Microsoft (Nasdaq:MSFT) look like better relative values. That said, IBM is a reliable and well-run company, and patient long-term investors could do worse than hold fairly-valued shares of this tech titan.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.