Evercore ISI on October 19 reiterated its Outperform rating and $250 price target on IBM (NYSE: IBM), expecting the company's third-quarter results due October 21 to meet or slightly exceed market expectations.
The firm said whether software deals deferred in the second quarter can convert into revenue in the third and fourth quarters will be the key to judging IBM's growth outlook.
Evercore ISI expects IBM to maintain its 2026 guidance of 4% to 5% revenue growth at constant currency, along with a plan to increase full-year free cash flow by roughly $1 billion year over year.
Third-Quarter Revenue Expected at $16.8 Billion; Software Order Recovery Emerges as Core Variable
Evercore ISI expects IBM's third-quarter results to meet or slightly beat consensus, with Wall Street currently forecasting revenue of $16.8 billion and earnings per share of $2.86.
The firm believes some software deals deferred from the second quarter could convert into revenue in the September and December quarters, combined with continued growth in the Red Hat business and improved internal productivity, to support the company's performance.
Evercore ISI noted that the most important question for this earnings report is confirming whether IBM's weak second-quarter software performance stemmed from customers delaying signings and revenue recognition, or from genuinely weaker demand.
If the relevant deals can gradually recover in the second half, it would indicate the earlier revenue shortfall was mainly due to order timing and would help improve the market's assessment of IBM's software business growth.
For the fourth quarter, Evercore ISI expects IBM revenue of $20.5 billion and earnings per share of $4.58, compared with consensus estimates of $20.5 billion and $4.62 respectively.
The firm believes the timing of final revenue recognition for software deals will be an important variable affecting fourth-quarter performance.
Software Business Mix Improves; Fourth-Quarter Gross Margin May Exceed Market Expectations
Evercore ISI expects IBM's fourth-quarter gross margin to reach 59.3%, above the consensus estimate of 59.0%, mainly benefiting from a higher proportion of revenue from the more profitable software business and continued cost-saving measures.
Although revenue growth may be relatively modest, the firm still expects productivity improvements to drive IBM's full-year pretax margin expansion of about 1 percentage point.
Evercore ISI believes software revenue mix optimization and cost control can partially offset the impact of slower revenue growth.
On full-year performance, Evercore ISI expects IBM to maintain its 2026 target of 4% to 5% revenue growth at constant currency and continue to achieve its plan of increasing free cash flow by about $1 billion year over year.
For investors, the recovery of software orders and the extent of margin improvement will be important bases for judging whether the company can deliver on its full-year guidance.
UBS Says Less Than 50% of Deferred Orders Recovered, Cuts Full-Year Software Revenue Forecast by $1 Billion
Although Evercore ISI remains optimistic about the software business recovery, other Wall Street institutions are relatively cautious.
UBS recently maintained a Neutral rating on IBM, noting that less than 50% of the software deals deferred in the second quarter have been recovered so far, while supply chain issues also weigh on business performance.
Based on slower-than-expected order recovery progress, UBS cut its 2026 software revenue forecast for IBM by about $1 billion.
The firm believes the software deal delay issue has not been fully resolved and may continue to affect second-half revenue recognition and performance growth.
Truist Securities recently initiated coverage on IBM with a Hold rating.
The firm acknowledges IBM's market position in enterprise computing but remains cautious about the pace at which its artificial intelligence business translates from technology deployment into actual revenue.
In contrast, Yorkville Ives initiated coverage on IBM with an Outperform rating, mainly bullish on the company's comprehensive capabilities in artificial intelligence, quantum computing and enterprise infrastructure, believing that as enterprise customers accelerate putting AI into actual operations, the importance of IBM's existing infrastructure business will further increase.
Baird reiterated a Neutral rating, believing that the market's long-term expectations for the quantum computing business still need to be balanced against the operational realities of IBM's traditional businesses such as mainframes.
The firm plans to visit IBM's quantum computing facility in December to further assess the commercialization progress of related technologies.
IBM Earnings Imply Stock Price Swing of About 6.6%; Institutional Divergence Centers on Software Demand
IBM shares rose 1.83% on October 19 to close at $236.39.
At that price, Evercore ISI's $250 target implies about 5.8% potential upside.
Options market data shows investors expect IBM shares could swing about 6.6% after the October 21 earnings release.
Currently, Wall Street's main divergence on IBM centers on the pace of software business recovery and its impact on the 2027 growth outlook.
Evercore ISI believes the software deals deferred in the second quarter are expected to gradually materialize, and combined with Red Hat growth, software revenue mix improvement and productivity gains, this can support the company's full-year performance targets.
UBS, however, noted that less than half of deferred orders have been recovered, indicating that pressure on the software business has not been fully eliminated.
Therefore, the key to IBM's third-quarter earnings will be the software order recovery progress disclosed by management and whether these deals can convert into actual revenue in the fourth quarter.
If the company can demonstrate that the second-quarter performance shortfall was mainly due to deal delays, it would help ease market concerns about persistently weak software demand.
Comments