HSBC maintains Reduce on IBM: strong margin guidance, but valuation does not sufficiently match growth

Overview

This report is HSBC's update on IBM's 2Q26 results and latest full-year guidance. IBM reported 2Q26 results on July 22, 2026, after pre-announcing key income statement items on July 14. 2Q26 revenue rose 1% year over year in constant currency to USD17,161m, slowing sharply from 6% in 1Q26, and the company also lowered its 2026 revenue growth guidance; however, management maintained its target of a 100bp year-over-year improvement in Non-GAAP pre-tax margin. HSBC believes the margin guidance is impressive, but growth in the software segment, consulting performance, and overall relative valuation attractiveness remain insufficient, so it maintains Reduce.

Core views

The core views are: first, guidance for margin improvement is better than expected, but the 2Q26 pre-tax margin improvement was supported to a large extent by USD280m of Non-GAAP other income, so margin quality still needs to be verified; second, software segment performance was disappointing, with transaction processing, automation, and data sub-segments all showing either slowing growth or revenue recognition volatility; third, the infrastructure segment raised its full-year revenue growth outlook due to strong growth in distributed infrastructure, but the mainframe business has clearly slowed after entering the fifth quarter of the new product cycle; fourth, the consulting segment continues to underperform the broader IT services industry; fifth, IBM's valuation is not cheap relative to the sector median, while its EPS growth outlook is meaningfully below the sector median, leading HSBC to believe that better value exists in other names.

Analysis framework

The report uses earnings breakdown, segment growth tracking, earnings quality assessment, and an SOTP valuation framework. HSBC first reviews changes in 2Q26 revenue, margins, and Non-GAAP EPS, then analyzes the value contribution of Software, Consulting, Infrastructure, and Quantum computing separately, comparing IBM with SAP, Accenture, HP, and the sector median on EV/EBIT, growth, and margins, ultimately forming its target price and rating view.

Methodology notes

• Valuation methodsSOTP

  sum-of-the-parts valuation

  HSBC values businesses such as Software, Consulting, Infrastructure, and Quantum computing separately and then sums them to derive IBM's target price. The target price was lowered from USD175 to USD174, mainly reflecting a de-rating in overall sector valuation multiples.

• Valuation methodsEV/EBIT peer comparison

  enterprise value to operating profit multiple comparison

  The report uses 2027e Non-GAAP EV/EBIT to assess IBM and segment valuations and compares them with SAP, Accenture, HP, and the sector median to judge whether valuation is supported by growth.

• quality_of_earningsmargin quality check

  verification of the quality of margin improvement

  HSBC emphasizes the need to distinguish whether margin improvement comes from productivity, efficiency, and supply chain optimization, or from one-off factors such as other income and low-cost legacy inventory; the latter is unlikely to change IBM's investment value.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• IBM equity

  covered company

  Strengths

  Margin guidance was better than expected, with management expecting 2026 Non-GAAP pre-tax margin to improve by 100bp year over year; hybrid cloud grew 11% in constant currency in 2Q26; distributed infrastructure revenue grew 37% year over year; annual recurring revenue rose 8% year over year, showing some resilience.

  Weaknesses

  2026 revenue growth guidance was cut to 4%-5%; software segment growth slowed and organic growth fell to 0%; the consulting business continues to underperform the IT services industry; Non-GAAP operating margin declined year over year.

  Comparison

  IBM's CY27e Non-GAAP EV/EBIT is 14.2x, slightly above the sector median of 13.9x, but CY26-28e Non-GAAP EPS CAGR is expected at 6.7%, well below the sector median of 19.2%.

  Risks

  If delayed software revenue ultimately fails to convert, margin improvement relies on one-off income, or the macro/IT spending environment weakens, the share price may remain under pressure.

• Software segment

  core valuation and growth driver

  Strengths

  The hybrid cloud sub-segment grew 11% in constant currency in 2Q26, and annual recurring revenue increased 8% year over year.

  Weaknesses

  2Q26 constant-currency growth slowed to 4.6%, with organic growth falling to 0%; 2026 growth guidance was lowered from above 10% to 6%-8%; transaction processing fell 9% year over year, automation growth slowed to 3%, and the data sub-segment slowed significantly excluding the Confluent acquisition contribution.

  Comparison

  HSBC uses SAP as the reference for the software business and lowers the target EV/EBIT multiple to 10.9x; IBM software CY26-30e Non-GAAP EBIT CAGR is projected at 10.2%, close to SAP's 10.3%.

  Risks

  Revenue recognition timing volatility, customer capex shifting toward servers/storage/memory, and acquisition contributions masking organic slowdown.

• Consulting segment

  segment valuation and services exposure

  Strengths

  Management expects full-year constant-currency revenue growth to accelerate to low- to mid-single digits; margins have improved from a low base.

  Weaknesses

  2Q26 constant-currency revenue grew only 1% year over year, while reported growth was 0.2%, lagging the broader IT services industry's estimated 2Q26 reported growth of 3.6%.

  Comparison

  HSBC uses Accenture as the closest comparable company; the consulting segment's target EV is USD15,647m, equivalent to 6.7x 2027e Non-GAAP EV/EBIT.

  Risks

  Weak IT services demand, continued revenue growth underperformance versus peers, and margin improvement failing to offset insufficient growth.

• Infrastructure segment

  cyclical hardware and infrastructure exposure

  Strengths

  Distributed infrastructure revenue rose 37% year over year in 2Q26, prompting management to raise 2026 segment revenue guidance from a low-single-digit decline to low-single-digit growth.

  Weaknesses

  2Q26 infrastructure constant-currency revenue fell 7% year over year; with z17 in its fifth quarter after launch, mainframe revenue fell 42% year over year, weaker than a typical new product cycle.

  Comparison

  HSBC uses HP as the closest financial reference and assigns a 30% premium; the infrastructure target EV is USD21,079m, equivalent to 8.7x 2027e Non-GAAP EV/EBIT.

  Risks

  A sharper-than-expected decline in the mainframe cycle, customer capex reallocation due to rising component costs, and fading low-base effects in distributed infrastructure.

• Quantum computing business

  component of SOTP valuation

  Strengths

  Based on a bottom-up market and business valuation of quantum computing, HSBC values this business at USD36,751m.

  Weaknesses

  The main body of the report does not provide new operating data in this update, and the valuation relies on prior thematic assumptions.

  Comparison

  This valuation comes from HSBC's prior bottom-up analysis of IBM's quantum computing business rather than traditional comparable-company multiples.

  Risks

  Uncertainty around commercialization progress, market size, technology pathway, and valuation assumptions.

Key data

• RatingReduceHSBC maintains its rating unchanged.
• Target priceUSD174Previously USD175, slightly lowered due to lower sector valuation multiples.
• Current share priceUSD205.77As of the close on July 22, 2026.
• Implied upside/downside-15.4%The target price implies downside versus the current share price.
• 2Q26 revenueUSD17,161m, +1% year over year in constant currency1Q26 constant-currency growth was 6%.
• 2026 revenue growth guidance4%-5% constant-currency growthPrevious guidance was above 5%.
• 2026 Non-GAAP pre-tax margin guidance100bp year-over-year improvementManagement maintained this margin improvement target despite lowering revenue guidance.
• 2Q26 Non-GAAP operating margin20.4%, down 106bp year over yearExcluding favorable other-income impact, Non-GAAP pre-tax margin would have declined about 90bp year over year.
• Software 2Q26 constant-currency growth4.6%Below 1Q26's 8%, with organic growth falling to 0%.
• Software 2026 revenue growth guidance6%-8% constant-currency growthPreviously above 10%.
• Infrastructure 2Q26 constant-currency growth-7%Weak mainframe performance was partly offset by 37% year-over-year growth in distributed infrastructure revenue.
• Consulting 2Q26 constant-currency growth1%The report says it continues to underperform the broader IT services industry.
• CY27e Non-GAAP EV/EBIT14.2xThe sector median is 13.9x.
• CY26-28e Non-GAAP EPS CAGR6.7%The sector median is 19.2%.

Impact & implications

The implication for the investment view is that IBM's near-term margin guidance can support modest upward revisions to EPS forecasts, but insufficient revenue momentum—especially in software organic growth and the consulting business's relative performance—leaves valuation without a sufficient margin of safety. If margin improvement is driven mainly by one-off other income or low-cost inventory, the investment case improves only marginally; only sustainable margin gains from efficiency, productivity, and supply chain optimization could change the market's view of IBM's growth quality.

Risks

• Upside risks include cost-cutting being more effective than expected.
• Upside risks include AI and other software product revenue coming in above expectations.
• Upside risks include a better-than-expected macroeconomic and equity market environment.
• Downside or continued pressure risks include weak software organic growth, delayed revenue recognition failing to convert into subsequent revenue, and the consulting business continuing to underperform peers.
• If margin improvement is driven mainly by one-off factors such as other income or low-cost legacy inventory, it may fail to enhance IBM's long-term investment value.

What to watch

• The quality of delivery on the 100bp year-over-year improvement in 2026 Non-GAAP pre-tax margin, especially the share attributable to one-off other income.
• Whether second-half transaction processing revenue in the Software segment is merely delayed rather than lost.
• Whether organic growth in the Hybrid cloud, Automation, and Data sub-segments can recover.
• Whether the Consulting segment can improve from low-single-digit growth to the low- to mid-single-digit growth guided by management.
• Whether high growth in distributed infrastructure can offset the mainframe cycle downturn within Infrastructure.
• Sector valuation multiples and the re-rating of comparables such as SAP, Accenture, and HP.