IBM: Mainframe-Led Soft Q2 Performance Should Not Change Long-Term AI Positioning

Key Morningstar Metrics for IBM

• Fair Value Estimate
  : $260.00
• Morningstar Rating
  : ★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : Medium

IBM’s IBM preliminary second-quarter results showed total revenue of $17.2 billion and GAAP earnings per share of $2.27, both of which fell short of expectations. The year-over-year growth of software (5%) and infrastructure (negative 7%) this quarter was 600 basis points below our original forecasts.

Why it matters: Management attributed the quarterly underperformance to a shift in client capital expenditures from mainframes to servers, storage, and memory, citing supply constraints that pushed up component prices. Notably, client spending on cybersecurity also took a toll on IBM’s quarterly results.

• We believe clients are more likely to delay, rather than cancel, their mainframe upgrades. Following the successful launch of IBM’s z17 mainframe, the product became a major driver of IBM’s outperformance in 2025, underpinning positive client reactions to its built-in AI capabilities.
• Mainframes are architecturally different from hyperscalers’ servers. Workloads running on these two types of hardware are not interchangeable. Mainframes remain relevant in an AI world because of their reliability and compatibility for mission-critical functions like core banking.

The bottom line: We maintain our $260 fair value estimate for narrow-moat IBM, as today’s update focuses on short-term performance that does not warrant changing our long-term outlook. Shares currently look moderately undervalued.

• We noticed that IBM’s soft performance triggered a broad selloff across software and IT services, which we think is overdone. The main driver of IBM’s 26% intraday stock decline was its mainframe ecosystem, with no signs that AI hardware investments will entirely crowd out software.
• IBM’s long-term AI opportunities come from its hybrid cloud and data software, rather than mainframe-related offerings. We like the 11% sequential growth acceleration that Red Hat posted, and we think the cross-sell opportunities across IBM’s portfolio stay intact.