Last Update 20 Jan 26

Fair value Increased 2.78%

IBM: Quantum And Software Execution Will Drive Returns Through Workforce Shift

Analysts have nudged their fair value estimate for International Business Machines higher to about $302 from roughly $294, citing updated long term assumptions on revenue growth, profitability, and future P/E multiples that reflect recent price target moves and emerging views on quantum computing and software performance.

Analyst Commentary

Recent Street research on International Business Machines highlights a split view, with some analysts leaning into upside tied to quantum computing and recent acquisitions, while others focus on execution risks in core software and the timeline needed to support higher valuation multiples.

Bullish Takeaways

Some bullish analysts are comfortable rolling their valuation work forward to 2027, which supports higher price targets in the low to mid US$300s and suggests they see the current setup as more about multi year earnings power than near term quarterly swings.
The Confluent acquisition is seen by bulls as a meaningful piece of the software story, with potential to strengthen IBM's data and integration portfolio and support a higher implied P/E if synergy and integration milestones are met.
Quantum computing is a key upside swing factor for bullish analysts, who point to IBM's current quantum footprint and developer mindshare through Qiskit as ingredients that could, if commercialized at scale, support future high margin revenue streams.
Recent commentary around Q3 performance cites reasonable results, including better Software growth helped by HashiCorp, a return to growth in Consulting, and solid margins and free cash flow. This supports the view that IBM can fund investments while still appealing to investors focused on cash generation.

Bearish Takeaways

Bearish analysts highlight software execution challenges, with Red Hat and Transaction Processing decelerations standing out and creating questions about IBM's ability to deliver 5% plus revenue growth in 2026 without a step up in performance from these franchises.
Some caution that Infrastructure and Consulting outperformance, while helpful, does not fully offset concerns around the software trajectory, which they see as central to sustaining higher valuation multiples over time.
One concern is that, after a strong year in 2025, the setup heading into 2026 could be tougher, particularly if expectations have moved ahead of what IBM can reasonably deliver as it integrates acquisitions and invests in quantum.
There is also a view that recent quarter details, including disappointment around Red Hat and Transaction Processing, could drive near term share consolidation as investors reassess how quickly IBM can reaccelerate software growth and justify higher price targets.

What's in the News

IBM plans to cut a low single digit percentage of its global workforce this quarter as part of an ongoing shift toward higher growth software and services, according to a company spokesperson quoted by Bloomberg (Bloomberg).
IBM launched IBM Enterprise Advantage, an asset based consulting service that helps clients build and govern their own internal AI platforms across multiple clouds and AI models, with early use cases at Pearson and a manufacturing client highlighting AI assistants and workflow redesign (Key Developments).
IBM and Pearson agreed a global partnership to create AI powered learning tools using watsonx Orchestrate and watsonx Governance. IBM will help Pearson build a custom AI learning platform and will use Pearson's credentialing and workforce planning products across IBM employees and customers (Key Developments).
IBM and Riyadh Air advanced their collaboration to run the carrier as an AI native airline. The partnership uses IBM Consulting and watsonx Orchestrate to support AI based employee tools, crew enablement, customer care and integrated performance management as Riyadh Air ramps operations (Key Developments).
IBM is reported to be in advanced talks to acquire Confluent for about US$11b to expand its real time data and cloud capabilities. The Wall Street Journal cited unnamed sources and noted that the deal could be announced in early December 2025, while neither company has publicly commented in that report (Key Developments).

Valuation Changes

The fair value estimate edged higher from about US$293.89 to roughly US$302.05 per share, reflecting updated model inputs.
The discount rate was adjusted slightly from 9.72% to about 9.70%, a modest change in the assumed required return.
Assumed revenue growth moved from 5.16% to about 5.18%, indicating a very small tweak to top line expectations.
The net profit margin was held essentially flat, shifting from 14.31% to around 14.30% in the updated assumptions.
The future P/E increased from about 34.13x to roughly 35.06x, implying a somewhat higher multiple applied to projected earnings.

IBM's strategy in hybrid cloud, AI, and strategic acquisitions could drive revenue growth, margin expansion, and client trust in modernizing IT infrastructure.
Investments in advanced technologies like the z17 mainframe and generative AI enhance differentiation and pricing power, potentially boosting infrastructure revenue and net margins.
Uncertain macroeconomic conditions and competitive pressures could affect Consulting and Software segments, with currency volatility posing further risks to revenue and growth.

Catalysts

About International Business Machines

Provides integrated solutions and services in the United States, Europe, the Middle East, Africa, Asia Pacific, and internationally.What are the underlying business or industry changes driving this perspective?

IBM's focused strategy on hybrid cloud and AI is driving solid revenue growth, providing cost savings, productivity gains, and scalability for clients, which is expected to continue supporting their revenue trajectory.
The launch of the z17 mainframe with enhanced AI acceleration and energy efficiency is anticipated to drive significant customer adoption, positively impacting infrastructure revenue and possibly net margins due to differentiation and pricing power.
IBM's continued investment in generative AI and integration through acquisitions such as HashiCorp is set to enhance their software capabilities, potentially boosting software revenue and supporting long-term margin expansion through high-value recurring revenue.
Growth in IBM's Red Hat OpenShift and containerization services indicates strong demand and client trust, which could lead to increased revenue from the software segment as enterprises modernize their IT infrastructure.
IBM's strategic diversification in its supply chain and disciplined cost management, combined with productivity initiatives, are poised to protect margins and enhance cash flow resilience amidst macroeconomic uncertainties.

International Business Machines Earnings and Revenue Growth

International Business Machines Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming International Business Machines's revenue will grow by 5.1% annually over the next 3 years.
Analysts assume that profit margins will increase from 9.1% today to 14.1% in 3 years time.
Analysts expect earnings to reach $10.5 billion (and earnings per share of $10.51) by about September 2028, up from $5.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $8.2 billion.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.7x on those 2028 earnings, down from 41.2x today. This future PE is greater than the current PE for the US IT industry at 29.0x.
Analysts expect the number of shares outstanding to grow by 0.74% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 9.71%, as per the Simply Wall St company report.

International Business Machines Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

Uncertainty in the macroeconomic environment could lead clients to adopt a wait-and-see approach, impacting Consulting revenues due to discretionary project pullbacks and delays in decision-making.
Federal business exposure, particularly consulting for government contracts, may face volatility due to potential discretionary spending cuts, impacting revenue growth.
The Software segment's reliance on consumption-based services, which can be susceptible to macroeconomic downturns, poses a risk to sustained revenue growth.
Competitive pressures in virtualization and the potential for a slowdown in Red Hat's consumption-based services could impact the anticipated growth trajectory and revenue realization.
Currency volatility, especially significant fluctuations in the U.S. dollar, could create unexpected challenges in revenue projections and free cash flow generation.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of $281.316 for International Business Machines based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $350.0, and the most bearish reporting a price target of just $198.0.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $74.4 billion, earnings will come to $10.5 billion, and it would be trading on a PE ratio of 33.7x, assuming you use a discount rate of 9.7%.
Given the current share price of $259.11, the analyst price target of $281.32 is 7.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

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Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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