IBM's stock fell 7% in after-hours trading on Wednesday, extending its year-to-date decline to 15%. The drop occurred even as the tech giant reaffirmed its full-year forecast, following first-quarter results that surpassed Wall Street expectations. The company failed to ease investor concerns that artificial intelligence could disrupt its core business operations.
For the quarter ended March 31, software revenue increased by 11% to $7.05 billion, slightly above the anticipated $7.02 billion. Total revenue grew by 9% to $15.9 billion, exceeding the analyst consensus estimate of $15.7 billion. Adjusted earnings per share were $1.91, also beating expectations.
Furthermore, sales in IBM's infrastructure unit, which includes mainframe computers, rose 15% to $3.33 billion, surpassing analyst forecasts. Consulting revenue increased by 4% to $5.27 billion, marking its highest growth rate since 2023, though it fell slightly short of expectations. Other revenue declined 21% year-over-year to $48 million.
On the earnings call, Chief Executive Officer Arvind Krishna downplayed the impact of Middle East conflicts, stating that IBM achieved its strongest growth in the region in decades and could withstand the effects of a potential weeks-long closure of the Strait of Hormuz. Regarding the conflict that began on February 28, Krishna said, "The situation in the Middle East did not impact us in the first quarter. While uncertainty remains, our diversification across geographies, industries, and large enterprise clients positions us well."
In response to the AI wave, IBM is attempting to reposition itself through strategic acquisitions. By integrating Red Hat, HashiCorp, and the recently accelerated $11 billion acquisition of Confluent, IBM is aggressively building an end-to-end data and AI stack, aiming to transform into a high-growth software company. This new strategy has placed IBM under investor scrutiny, with many fearing that AI tools will render numerous existing software products obsolete.
In February, AI startup Anthropic released a tool named Claude Code, claiming it can assist in modernizing COBOL code—an outdated programming language that has run on IBM mainframes for decades. The announcement triggered one of IBM's largest stock sell-offs in decades. COBOL underpins core transaction systems in critical global industries like finance and aviation. The language's complexity and the high cost of migration have long formed a solid "moat" for IBM's consulting and mainframe businesses. Companies seeking to leave the IBM ecosystem typically face significant technical risks and require thousands of hours of consulting work. The breakthrough potential of Anthropic's tool lies in AI's ability to substantially lower this exit barrier. If system migration costs plummet, IBM's high-margin, long-term service contracts and hardware renewal revenue—key to its survival—could face erosion.
Investors are less concerned with IBM's current profitability and more worried that the foundation of its future revenue model is under threat from AI technology. As tools that automate routine corporate functions emerge, fears are growing that AI will cannibalize the software industry. IBM's first-quarter revenue growth was lower than the 12.2% increase seen in the previous quarter. Revenue growth in IBM's software division, centered around the high-margin hybrid cloud unit Red Hat and the AI tool suite under the Watsonx brand, also slowed compared to the prior quarter.
Jefferies analyst Brent Thill noted in an interview that investors were expecting stronger performance from IBM's software division. He added that Wall Street would likely focus on whether customers are delaying IBM purchases as they trial tools from AI-focused companies. The early completion of the Confluent deal was expected to contribute approximately 2 percentage points of incremental growth to the software business. However, management reaffirmed its 2026 outlook—forecasting over 5% revenue growth at constant currency and a $1 billion increase in free cash flow—without raising these targets despite the accelerated acquisition. This conservative stance was interpreted by some investors as a sign that management is uncertain it can fully offset the potential impact of AI on its traditional businesses, even with new revenue streams.
Like most software providers, IBM is integrating AI into its products and heavily promoting its ability to offer clients the latest technology. Chief Financial Officer Jim Kavanaugh stated in an interview that the company expects its generative AI-related software portfolio to contribute 2 percentage points of growth this year. He added that AI-related work is increasing demand for IBM's infrastructure software, which enables customers to utilize leading AI models.
Wall Street sentiment toward IBM is now clearly divided. Although several firms lowered their price targets ahead of the earnings report, most maintained "Buy" or "Outperform" ratings, arguing that the market's pricing of AI-related risks is overly pessimistic. Bullish analysts believe IBM's deep relationships with government and enterprise clients, combined with its own AI product portfolio, such as Watsonx, position it to capture a share of the hybrid cloud and AI services market. Bears, however, contend that AI automation tools will fundamentally compress margins for software and consulting services, leading to a long-term contraction in IBM's valuation multiples.
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