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After last week’s earnings warning sent IBM’s stock into a downward spiral, it may seem like the fate of its shares is sealed. Yet that may not be the case.
After Wednesday’s closing bell, the company posted roughly $17.2 billion in revenue for the second quarter, driven by a 7% year-over-year drop in infrastructure, flat consulting sales, and a 5% uptick in software. Wall Street was looking for $17.5 billion.
Adjusted earnings came to $2.93 a share, behind the $2.95 analysts were expecting.
Investors already had an idea of what the numbers would look like. IBM previewed its second-quarter earnings last week—a rare move for a company that had only pre-announced earnings once before in its history, during the 2008 financial crisis.
The real sting came in the revised guidance. Big Blue trimmed its full-year revenue outlook, guiding for constant-currency growth in the range of 4% to 5%. Earlier this year, management had projected more than 5% growth.
CEO Arvind Krishna said the company was “in the early innings of a structural shift for business,” building on a key narrative from last week’s shareholder letter.
Krishna issued commentary around artificial-intelligence spending on July 14, saying that some customers suddenly shifted their budgets toward servers, memory, and other “supply-constrained infrastructure” to get ahead of expected price hikes.
“This dynamic impacted client buying patterns,” Krishna explained at the time. “While we anticipated some supply chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization.”
Shares plunged 25%, marking their worst one-day decline ever and wiping out nearly $70 billion in market value. The stock fell 26% last week—the worst weekly performance in the company’s history.
Shares had a less jarring reaction on Wednesday. IBM wavered in after-hours trading, initially rising more than 2% before turning slightly lower. The stock had ended the regular session down 2.3% at $205.77—its lowest close since November 2024.
The real story wasn’t in the numbers. Rather, investors were looking for signs of future execution and clarity around IBM’s plans to recover from the quarter’s missteps.
Pivoting from the downbeat tone of his shareholder letter, Krishna said Wednesday that IBM was actively moving to boost revenue growth and profitability, sharpening its go-to-market strategy and “targeting thousands of new clients.”
Free cash flow was a rare bright spot. Reaffirming prior guidance, IBM said the metric should still increase by about $1 billion for the year.
“Cashflow is always important for IBM,” BNP Paribas analyst Stefan Slowinski told Barron’s ahead of the report. “It’s never good if you miss on the top line and you’re not growing, but you should protect the bottom line. Even if they do take down their full-year revenue guidance, can they keep their full-year cash flow guidance?”
Wall Street may have been bracing for worse. Ahead of the report, Evercore analyst Amit Daryanani anticipated that revenue growth would be revised down to the low-to-mid single digits.
Now, investors are questioning whether the company is facing execution issues in the face of unexpected changes, or if there are signs of a broader shift in customer behavior that IBM must adapt to. Krishna said last week that “numerous large deals” had failed to close on the timelines IBM expected, “driving the majority of our shortfall.”
“IBM has to show customers are still spending, the AI and software opportunity remains intact, and that management has a credible plan to get growth back on track,” Mizuho’s Dan O’Regan said in an interview with Barron’s.
Given that IBM had been trading earlier this year near all-time highs, the selloff was partly warranted, O’Regan said. Even so, he believes the market was overlooking momentum in “several of IBM’s strategic businesses,” particularly software and AI-related offerings.
“If those trends remain intact, investors may ultimately view this as an execution reset rather than a deterioration of the long-term story,” O’Regan explained.
Although the earnings warning triggered a wave of price-target cuts, most firms aren’t changing their tune on IBM stock. The consensus rating on FactSet remains Overweight. On Tuesday, Jefferies analysts reaffirmed their Buy rating on the shares, even as they lowered their price target to $260 from $320.
For Wall Street bears, the pre-announcement validated long-held doubts rather than offering a fresh perspective. Slowinski has long argued that the stock was trading at an unwarranted premium to the broader market.
“We’ve been concerned about valuation,” the analyst said. “Investors are overpaying for very low organic growth.” To counter that drag, he said, IBM has relied on buying faster-growing software firms to artificially lift its overall profile.
IBM emphasized that recent software deals—including the acquisitions of HashiCorp in 2025 and Confluent this past March—“continue to deliver strong performance.” Management also detailed efforts to capitalize on growing AI adoption, including targeted hiring for specialized roles.
Big Blue has repeatedly pitched AI as a growth driver, even describing it as a tailwind as recently as April. On Wednesday, Krishna reiterated that AI and automation were “driving productivity across the company,” while Chief Financial Officer James Kavanaugh said AI represented more than half of all consulting signings in the quarter.
Yet the technology is proving to be a double-edged sword, as AI spending squeezes traditional IT budgets.
Much of the shortfall in the quarter was driven by IBM’s infrastructure segment, which houses the mainframe computers used by banks and credit-card networks. Customers didn’t just pull back on buying the physical hardware—they also slowed purchases of the high-margin software associated with mainframes.
The business, which Slowinski describes as a “low-single-digit organic grower,” faces other pressures as well.
IBM stock slid in February after AI start-up Anthropic released a COBOL modernization playbook for its Claude Code tool, claiming it could drastically simplify updates to the dated language that powers IBM mainframes.
Historically, the high cost and complexity of migrating off these mainframes protected IBM’s market position—a defensive moat AI threatens to weaken. Krishna, however, pushed back on Wednesday, saying the company sees “no evidence” of clients leaving the platform.
Slowinski views second-quarter earnings as a crucial test for IBM.
“If they can pull some levers, that gives investors confidence that, even if the market changes and they miss on revenue, they typically now know how to adapt their business,” he said. “We’re looking for anything they can do or say to show they’re protecting the bottom line, they’re protecting earnings, they’re protecting cashflow.”
Write to Mackenzie Tatananni at [email protected]
