New Mainframe Cycle and Seasonally Strong Quarter Team for IBM's Q2 2022 Beat; Shares Fairly Valued

IBM’s second quarter beat FactSet consensus for the top and bottom lines despite currency and inflationary headwinds, especially for IBM's consulting business. As a reminder, IBM's second quarter is seasonally a strong one, and this was combined with the launch of a new mainframe cycle, with the z16, a combination that IBM hasn't benefited from in 20 years. The combination helped blitz headwinds, but we caution investors that this was more happenstance than an element of long-term beneficial change. And, while the revenue outlook was reconfirmed for the year, management tapered free cash flow estimates due to headwinds from currency and Russia, bringing shares down approximately 4% upon results to near $132 per share. We are maintaining our fair value estimate of $126 per share for the narrow-moat IT services provider, which leaves the company fairly valued.