IBM Earnings: Margin Expansion and a Stable Guide Signal IBM Is Faring Well; Shares Fairly Valued

IBM’s first quarter came short of our expectations on the top line while exceeding our earnings forecasts, thanks to margin strength. While consulting revenue has weakened due to its discretionary nature, we found it comforting that IBM is not seeing weakness in software, as we believe software is the stickiest of IBM’s offering, which contributes to the firm’s narrow moat. This assurance is reflected in management’s roughly maintained guidance for the year. As a result, we are reiterating our fair value estimate of $126 per share, which leaves shares fairly valued, in our view. As a reminder, since December 2022, IBM’s stock price has consistently fallen, approaching our fair value estimate. We believe the market is now properly factoring in IBM’s vulnerabilities amid tougher competition in a quite different IT services landscape compared with the once closed systems landscape it used to benefit from.