Truist starts IBM at Hold, says AI demand timing is the key question
Investing.com -- Truist Securities on Friday initiated coverage of IBM at Hold with a $240 price target, saying it is constructive on the company’s long-term position in enterprise computing but cautious on near-term execution.
Analysts led by Arvind Ramnani said IBM is positioned across four areas: the mainframes where much of the world’s transaction data resides, software that works across AI models, Red Hat, and a consulting arm that helps clients deploy AI.
But the major concern is timing. "When will enterprise spending on AI infrastructure translate into demand for IBM?" the analysts asked. Software now makes up 45% of revenue and 61% of segment pre-tax income, with about 80% of it recurring, and annual recurring revenue of $24.6 billion growing 8%.
Analysts called IBM’s second-quarter miss "an execution and timing issue rather than a structural problem." Clients shifted budgets toward servers, storage and memory to secure supply-constrained AI hardware, and dozens of large mainframe-linked software contracts were deferred, not canceled. IBM cut its full-year constant-currency revenue growth guidance to 4%-5% from 5%-plus, and sized the software shortfall at $400 million to $500 million.
IBM shares fell more than 20% after the miss, mostly through multiple compression, with forward P/E dropping to 16 times from 22 times. The stock now trades at about 17 times forward earnings.
The analysts said three things could make them more constructive — deferred contracts closing without meaningful discounts, a sustained improvement in Transaction Processing growth, and stronger organic software growth, rather than growth driven by acquisitions.
Truist’s price target applies 18 times fiscal 2027 operating EPS of $13.18. Analysts said that multiple is supported by IBM’s free cash flow margins and higher software mix. Consensus expects IBM to convert 22.2% of revenue into free cash flow in 2026, versus a peer average of 12.7%, while the stock trades at 17.5 times forward earnings against a peer average of 18.3 times.
Potential risks include Transaction Processing failing to recover, AI infrastructure spending crowding out spending on IBM, and AI disrupting software and compressing consulting prices. Upside risks include faster conversion of slipped deals, scaling of distributed infrastructure and larger-than-expected productivity gains.