IBM (IBM) recently reported second-quarter results that topped Wall Street expectations for both revenue and profit, but weaker-than-expected sales in its core software segment disappointed investors. Indeed, the tech company’s software revenue came in at $7.39 billion, which was slightly below analyst estimates of $7.41 billion, according to LSEG data. This overshadowed the stronger results from its mainframe business, where demand was boosted by AI-related upgrades. As a result, IBM shares are down more than 8% at the time of writing after gaining nearly 30% earlier this year due to optimism about software-driven growth.
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It is worth noting that much of the software miss came from transaction processing sales, which remained flat during the quarter. In fact, IBM’s CFO, Jim Kavanaugh, explained to Reuters that many customers have shifted their spending toward the company’s latest AI-improved mainframes, thereby diverting revenue away from software tied to older mainframe transactions. Interestingly, though, the infrastructure segment, which includes the mainframe business, posted $4.14 billion in revenue to top estimates of $3.81 billion.
IBM’s consulting division also showed some improvement, with sales rising by 3% and ending a streak of five consecutive quarters of decline as companies look for help adding AI tools. However, Kavanaugh said on the post-earnings call that the company is cautious about how much consulting revenue will contribute to growth for the rest of the year, given current demand conditions. Nevertheless, IBM highlighted that its “AI book of business,” which tracks both bookings and sales, has now grown to $7.5 billion, up $1.5 billion from the prior quarter.
Is IBM a Buy, Sell, or Hold?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on IBM stock based on eight Buys, four Holds, and two Sells assigned in the past three months, as indicated by the graphic below. Furthermore, the average IBM price target of $288.69 per share implies 11.9% upside potential.
