Since IBM broke out to an all-time-high (above the April, 2013 high of $215 – $216 per share) the stock has been range-bound between $200 at the low-end and $325 – $335 at the high-end of the trading range. The peak price prints or all-time-highs, since the Sept ’24 breakout for IBM were $324.90 on 11/25/95 and then again $332.46 on June 3rd ’26, and the price surges are being primarily driven by quantum headlines.
The June 3rd headlines were IBM announcements, detailing a planned $10 billion quantum investment over the next 5 years, with IBM slated to deliver the first fault-tolerant quantum computer by 1929 (per the press release). This follows the May 21, ’26 headline from the Dept of Commerce, that the DOC was awarding a $1 billion grant to IBM to create a new IBM company, Anderon, which is expected to be America’s first pure-play quantum foundry.
While the stock trades up when other quantum stocks get a bid on news, the downside is formidable when those headlines dissipate.
The problem is IBM management has given off a lot of mixed signals, mostly on AI, where they withdrew their AI guidance on the April ’26 call, by effectively NOT updating the AI book even though AI metrics were given on the previous three conference calls, which showed the AI book was growing. (Link is here.)
When IBM reports their actual Q2 ’26 results Wednesday night, July 22nd after the closing bell, analyst consensus has naturally lowered expectations after the negative IBM pre-announcement last week, that dropped the stock 25% during the trading day.
- The consensus revenue estimate was $17.7 billion, but is now $16.9 billion.
- The consensus EPS estimate was $3.00, but is now $2.88.
- The current operating income estimate is $3.7 billion. (Not sure where it was before the guide-down last week.)
- The YTD consensus free-cash-flow estimate is currently $5.8 billion, while management noted in the press release that YTD free-cash-flow was actually $4.8 billion.
(Estimates sourced from LSEG and Factset)
Summary: It’s hard where to know where to go from here on IBM, i.e. continue to hold, lower clients cost basis by adding more shares, or sell entirely, etc. In terms of portfolio construction of client portfolios, the last 4 years string of strong returns by the SP 500 has warranted looking for “non-correlated” stocks to the strong equity bull market that started on March 9th, 2009, and IBM (and Boeing) looked to be a perfect fit for that “factor” (for lack of a better word), to disperse risk in client accounts.
IBM’s announcement though is very disappointing, although the stock is still range-bound in this $200 to $300 (and up) range it’s been in.
To be frank with readers, the dropping of any mention of the AI book on the late April ’26 earnings call, is more troublesome than the negative pre-announcement this week. It’s clear that while IBM has some tangential exposure to AI and it’s growth, it was probably “guesstimating” the amount of the AI book and it’s impact on revenue, and was forced to ultimately fess-up.
After managing money for 30 years, many companies have adopted the “fake it until you make it” style of handing quarterly results. I thought Oracle was one of the most egregious last decade, after the cloud emerged as a force within software, and Oracle’s conference calls were all “SAAS, PAAS and IASS” and it’s growing, (yada, yada, yada), and then in 2014 or 2015 Safra Catz, then CEO, got on a conference call, and just blew up the growth expectations. This blog has not owned much of the stock since, just because the routine has become familiar. (GE under Jack Welch did a form of this with “earnings smoothing” using GE Capital to make the quarter as the operating business started to drag.)
IBM did a form of this with Watson years ago: management “talked up” Watson, particularly around the healthcare segment, pouring at least $1 billion into the initiative (and probably more) and when analyst’s grew frustrated with the “all talk, how about the numbers ?” management ultimately told the Street they just couldn’t get it to work.
In other words, management talking about Watson, never led to any material financial impact for IBM by the health segment, which was it’s designated target market.
Many public companies misfire on their capex projects, and don’t ever earn the return hoped for when the investment is made, but usually don’t push the public awareness angle without being fairly certain the project will pay off.
It’s clear quantum is IBM’s future (at least the conversational part of it for now), but it’s doubtful quantum has any impact yet in analyst models, meaning it’s still too early for quantum to generate any revenue, operating income, etc., for Big Blue.
This blog has done some tax-loss selling of the stock in taxable accounts for clients, since it’s been hard to find those opportunities the last few years. IBM is still held in tax-deferred accounts, waiting for the conference call and waiting on the ultimate EPS and revenue revisions to reflect IBM’s current reality.
The last time Big Blue missed like this was was late 2014 (maybe 2015 ?), when IBM’s mantra was then “$20 in EPS by 2020” only to guide lower in their October call in 2014 or 2015, for what was typically the strongest quarter of the year.
The simple fact is Josef Schumpeter’s “creative destruction” may have ultimately caught up with IBM, so keep an eye on IBM’s trading range since late, 2024.
None of this is advice or a recommendation, but only an opinion. Past performance is no guarantee of future results. The source of IBM’s current estimates for the 2nd quarter are from both LSEG and Factset. Readers and clients should determine their own comfort with individual stock and portfolio volatility, and adjust accordingly. None of the above information may be updated, and if updated, may not be done on a timely basis.
Thanks for reading.