IBM Stock: 3 Reasons Q2 Earnings Weren’t as Bad as Investors Feared

International Business Machines (IBM) had already shocked investors with its preliminary earnings warning, sending the stock sharply lower even before the company released the Q2 report last week. However, a closer look at the earnings call revealed a more balanced picture of the business. While the earnings miss was real, so were many overlooked positives in the quarter. With IBM stock down 23% year-to-date (YTD), here are three encouraging trends that suggest the market may have overreacted.

1. The Software Business Didn't Break. Large Deals Simply Arrived Late

Software has become the foundation of IBM's transformation over the past several years. It now accounts for nearly 45% of total company revenue. Therefore, when management announced just 5% year-over-year (YoY) software revenue growth, down from the previous quarter’s double-digit growth, investors were disappointed. But as management mentioned earlier, it was due to the timing of the closing of the deals in the first few weeks of the third quarter. The majority of this delayed revenue will be recovered in subsequent quarters.

An even more reassuring sign in Q2 was the health of IBM's recurring software business. Notably, annual recurring revenue (ARR) climbed 8% YoY to $24.6 billion, indicating sustained growth in subscription-based products. Furthermore, IBM generates 80% of its software revenue through recurring subscriptions and consumption-based products. This makes its business much more predictable than it was a few years back. Total revenue climbed by 1% to $17.2 billion, with adjusted profits per share up 5% to $2.93. However, both revenue and earnings fell short of consensus estimates. 

Red Hat’s revenue grew 11%, driven by stronger subscription demand, while OpenShift ARR reached $2.2 billion, highlighting continued adoption of IBM's hybrid cloud platform. Taken together, these numbers prove that IBM’s software business remains fundamentally healthy. The slowing growth was indeed execution issues and not a shortage of demand across its software portfolio. 

2. Infrastructure Looked Weak on the Surface, but Several Businesses Quietly Improved

IBM’s infrastructure segment was the biggest disappointment in Q2 with revenue down 7% YoY, down from the double-digit trend in the previous quarters. However, management once again attributed this weakness to a rapid shift in enterprise spending during the final weeks of June, when customers prioritized safeguarding AI infrastructure due to supply shortages. There was no weakness in demand. And the reason makes more sense when you consider the $500 million infrastructure backlog, which is a strong indicator of future revenue.

The company also raised its full-year infrastructure outlook, now expecting low-single-digit growth for 2026 as continued strength in power, storage, and distributed infrastructure offsets swings in the mainframe business. While IBM Z revenue fell short of expectations, the current z17 refresh cycle is still running at nearly 130% program-to-program versus the previous generation. IBM is also seeing growing AI adoption on the platform. Notably, nearly half of z17 customers have purchased AI capabilities through the Spyre Accelerator, while clients who use Watsonx Code Assistant for Z grow their processing capacity three times quicker than those who do not.

Outside the mainframe business, distributed infrastructure revenue increased 37% YoY. Demand for power servers and storage solutions remained particularly strong as enterprises continued expanding AI infrastructure.

3. Cash Flow Story Remains One of Its Biggest Competitive Advantages

IBM’s cash generation was one of the biggest positives that investors might have overlooked. Through the first half of 2026, the company generated $4.8 billion in free cash flow, despite inventory investments, higher cash taxes, and increased interest expense. But the most encouraging sign was that IBM maintained its guidance to increase annual free cash flow by roughly $1 billion this year even though it lowered its revenue guidance. Management believes cost controls, AI-driven productivity improvements, supply chain efficiencies, and operational discipline can offset much of the revenue pressure experienced during the quarter. IBM also returned $3.2 billion to shareholders through dividends during the first half of the year. Additionally, with a strong balance sheet of $8.2 billion in cash, IBM has the flexibility to continue investing in AI, hybrid cloud, and quantum computing while rewarding shareholders.

Beyond AI, IBM is committed to its long-term opportunity in quantum computing by committing more than $10 billion in quantum technology over the next five years. IBM also announced plans to establish the world's first dedicated quantum foundry, backed by the U.S. Department of Commerce, while reaffirming its ambition to deliver the world's first large-scale, fault-tolerant quantum computer by 2029.

Quantum computing is unlikely to contribute to IBM’s earnings in the near future. However, a decade from now, quantum computing could reach where AI is now, and IBM could benefit greatly from this first-mover advantage.

The Bottom Line on IBM Stock

Finally, the Q2 earnings report showed some encouraging signs and wasn’t as bad as the market feared. Yet, IBM still has a lot to prove in the coming quarters, particularly regarding the reasons that it gave for the delay in execution of many large software transactions. Its core investment case built around recurring software, hybrid cloud, enterprise AI, strong cash generation, and long-term opportunities in quantum computing remains largely intact. That said, IBM's ability to convert its healthy backlog and delayed software pipeline into stronger results over the second half of the year will determine whether the stock is a buy. 

On Wall Street, IBM stock remains a consensus “Moderate Buy.” Out of the 24 analysts covering the stock, 11 have a “Strong Buy,” two have a “Moderate Buy” recommendation, 10 have a “Hold” rating, and one says it is a “Strong Sell.” IBM’s average price target of $256.39 implies the stock can bounce back by 11% from current levels. Plus, the high target price of $365 implies a potential upside of 59%.