By Akriti Shah (Reuters) -IBM shares dropped nearly 7% in premarket trading on Thursday after a decline in growth in its core cloud software segment spooked investors over Big Blue's ability to seize the booming demand for cloud services. Sluggish expansion in IBM's cloud business, a unit of its software segment, raised fresh concerns among investors about the company's ability to capitalize on the rapid growth in cloud services driven by AI adoption. 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. "This is particularly the case this year as investors anticipate lapping peak mainframe growth rates next year, when meaningful software growth will be needed to maintain healthy growth on a consolidated basis." 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. The New York-based IT giant raised its full-year revenue growth guidance to over 5% in constant currency and projected its free cash flow outlook to be about $14 billion. Some analysts also pointed the company could engage in mergers and acquisitions to boost its growth. "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 in Bengaluru; Editing by Krishna Chandra Eluri)
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