IBM shares rose 0.7% in premarket trading on Wednesday, recovering a fraction of the previous day's record losses after the company issued weak preliminary second-quarter results. The technology firm cited a faster-than-expected shift in client spending from software to AI servers as the primary driver of the shortfall. Morningstar analysts characterized the mainframe business weakness as a short-term setback, maintaining their $260 price target and stating clients are more likely delaying rather than canceling upgrades.
IBM Issues Second-Quarter Revenue Guidance Below Expectations
IBM expects second-quarter revenue to rise 1% to $17.2 billion, with 5% growth in its software business and a 7% decline in its infrastructure business. The company projects its gross profit margin to drop by 100 basis points to 57.7%.
The company attributed the weakness largely to its mainframe business, stating it "saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases."
IBM's warning sent several software stocks, including Salesforce and ServiceNow, lower on Tuesday.
Morningstar Maintains $260 Price Target Amid Mainframe Weakness
Morningstar issued a report stating the sell-off appeared exaggerated and maintained its $260 price target for IBM stock.
"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," the research firm said in its report.
"Today's update focuses on short-term performance that does not warrant changing our long-term outlook. Shares currently look moderately undervalued," Morningstar added, noting that IBM's long-term AI opportunities come from its hybrid cloud and data software rather than mainframe-related offerings.
Oppenheimer and HSBC Downgrade IBM Stock
Oppenheimer downgraded IBM stock to 'Perform' from 'Outperform,' according to an alert on TheFly. Just before the preliminary earnings release, HSBC had downgraded the stock to 'Reduce' from 'Hold' with a price target of $191, down from $231.
On Stocktwits, retail sentiment for IBM flipped to 'extremely bullish' as of early Wednesday from 'bearish' the previous day, while the 24-hour message volume rose nearly 3,000%.
"IBM $VIX $UVXY Do not underestimate IBM losing 30% in one day. Expect the contagion to spread across many causes 'the event,'" a trader wrote.
Another trader said, "$IBM glad I didn't pull the trigger at island bottom 264. But for sure will [watch] for bounce here."
With Tuesday's selloff, IBM stock is now down 25% year to date.
FAQ
What revenue guidance did IBM provide for the second quarter?
IBM expects second-quarter revenue to rise 1% to $17.2 billion, with 5% growth in its software business and a 7% decline in its infrastructure business. The company projects its gross profit margin to drop by 100 basis points to 57.7%.
Why did Morningstar maintain its price target despite IBM's weak results?
Morningstar maintained its $260 price target, stating that clients are more likely to delay rather than cancel mainframe upgrades and that the update focuses on short-term performance that does not warrant changing the firm's long-term outlook. The research firm characterized shares as moderately undervalued.
How did retail sentiment for IBM stock change after the preliminary results?
Retail sentiment for IBM on Stocktwits flipped to 'extremely bullish' as of early Wednesday from 'bearish' the previous day, while the 24-hour message volume rose nearly 3,000%.
