IBM 1Q26 EPS may beat expectations, but not enough to reignite bullish sentiment

Overview

This report is Morgan Stanley's preview of IBM's 1Q26 earnings. The core view is that IBM has upside to 1Q26 EPS, but a single-quarter beat is not enough to restart the bull case because the market has already largely priced in the 1Q EPS upside, while peer valuations across software, services, and quantum have been derated more sharply over the past 90 days and year to date. The report maintains an Equal-weight rating and cuts the target price from $247 to $215.

Core views

The report believes IBM is likely to beat consensus in 1Q26, with revenue and EPS forecast at $16.2B and $1.91, versus consensus of roughly $15.6B and $1.81. But the real determinant of upside is whether CY26 FCF gets revised higher. Morgan Stanley currently leaves its CY26 FCF estimate at $15.8B unchanged and believes it is still too early for management to raise full-year FCF guidance in the upcoming print. Therefore, 1Q26 earnings are not a major catalyst, and investors should not chase the stock at current valuation levels.

Analysis framework

The report combines the AlphaWise IBM Software Tracker, IBM Consulting hiring data, hardware supply-chain readings, peer valuation rerating, segment revenue forecasts, and a P/FCF valuation framework to assess IBM's short-term earnings and medium-term valuation. The focus is not whether single-quarter EPS beats expectations, but whether the quarterly upside can flow through to CY26 revenue, EPS, and FCF revisions higher.

Methodology notes

• Earnings forecastMorgan Stanley ModelWare

  Internal model framework

  Unless otherwise noted, the report says metrics are based on Morgan Stanley's ModelWare framework and are compared with Refinitiv consensus.

• Alternative dataAlphaWise IBM Software Tracker

  Software revenue tracker

  The tracker shows signs of an unexpected acceleration in 1Q26 software revenue growth, which is one of the main reasons for raising the software revenue forecast.

• Alternative dataIBM Consulting jobs postings tracker

  Consulting hiring leading indicator

  IBM Consulting's 90-day rolling hiring data rose 14% q/q in 1Q, and daily hiring volume was up 58% versus the end of 4Q25, which was used to gauge short-term revenue momentum in consulting.

• Valuation methodsP/FCF valuation and mark-to-market peer regression

  Free cash flow multiple valuation

  The report lowers the target P/FCF multiple from 15x to 13x to reflect derating in software and consulting peers, and on that basis cuts the target price to $215.

• Scenario analysisBull/Base/Bear risk-reward framework

  Risk-reward scenario framework

  The report lays out a bull case of $440, a base case of $215, and a bear case of $170, and supports the Equal-weight rating with a 14% risk-adjusted return.

Asset mapping & comparison

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

• IBM.US

  The report's main company, rated Equal-weight with a $215 target price.

  Strengths

  The software revenue tracker points to an acceleration in 1Q26; consulting hiring data improved; infrastructure may be supported by demand pulled forward; and quantum computing offers long-dated option value.

  Weaknesses

  CY26 FCF has not yet been revised higher; the current share price of about $237 is above the report's base-case valuation; peer valuations in software, consulting, and quantum have compressed; and 2026 growth may slow versus 2025.

  Comparison

  The report believes peer valuations in software and quantum have compressed faster over the past 90 days and year to date, and IBM's current valuation already reflects some of the 1Q EPS upside.

  Risks

  AI may disrupt Data, Automation, and Consulting; macro and geopolitical risks may lengthen sales cycles, hurt consulting bookings, and weaken infrastructure demand; poor execution is the key bear-case risk.

• CFLT.US

  Confluent's early inclusion contributes an inorganic lift to IBM's 1Q26 software revenue.

  Strengths

  The report estimates Confluent's early consolidation added about $50M of incremental upside to software revenue.

  Weaknesses

  This contribution is inorganic and does not fully reflect the quality of IBM's organic software growth.

  Comparison

  Together with HashiCorp and DataStax, it makes up part of the inorganic contribution to IBM's software revenue.

  Risks

  If the market cares more about organic growth and FCF, the valuation uplift from inorganic revenue contribution may be limited.

• Quantum pure-play peers

  A peer reference used to assess the valuation option value of IBM's quantum business.

  Strengths

  IBM is viewed as an early leader in quantum computing, and the bull case includes upside from quantum valuation.

  Weaknesses

  The EV/Sales median for quantum pure plays is down about 80% year to date, and commercialization still needs to be proven.

  Comparison

  The de-rating of quantum peers makes the market's pricing of IBM's quantum option more cautious.

  Risks

  Fault-tolerant quantum computing may still need years of validation, and if commercialization progresses more slowly than expected, the quantum option may not support valuation.

• Accenture

  A consulting peer read used to gauge the demand environment for IBM Consulting.

  Strengths

  Accenture's description of CY26 client spending is relatively stable, supporting the view that IBM Consulting will not deteriorate materially.

  Weaknesses

  Peer commentary remains muted and does not prove a strong rebound in consulting demand.

  Comparison

  IBM Consulting was only modestly raised, and the report did not materially increase its full-year view on the back of peer data.

  Risks

  If IT services spending does not rebound or AI substitution accelerates, IBM Consulting revenue could come under pressure.

Key data

• 1Q26 revenue forecast$16.2BRaised from the prior $15.8B and about 4% above consensus; +7.1% Y/Y on a constant-currency basis and +11.7% Y/Y as reported.
• 1Q26 EPS forecast$1.91Raised from the prior $1.83 and about 6% above consensus of $1.81.
• 2Q26 revenue and EPS forecast$17.9B; $3.03Revenue was raised from the prior $17.5B, EPS was lowered from the prior $3.13; overall, broadly in line with consensus.
• CY26 revenue and EPS forecast$72.0B; $12.28The report says the overall read versus consensus is mixed.
• CY26 FCF forecast$15.8BUnchanged, and the key reason the report sees insufficient near-term catalysts.
• 1Q26 software growth forecast+9.9% Y/Y at CCHigher than consensus at +8.7%; includes about 4 percentage points of inorganic contribution.
• 1Q26 consulting growth forecast+1.7% Y/Y at CCRaised by 20 bps thanks to improved hiring data.
• Infrastructure forecast adjustment1H up 4%, 2H down 3%Reflects demand pulled forward ahead of hardware supply risk; full-year CY26 infrastructure revenue is essentially unchanged.
• Target price$215Lowered from $247, based on 13x CY26 P/FCF and $16.47 FCF/share.
• Quantum peer valuationEV/Sales median down about 80% year to dateThe report believes quantum computing remains in a stage where commercial viability still needs to be proven.

Impact & implications

For investors, a short-term earnings beat at IBM does not automatically translate into a stock-price catalyst. Unless management raises CY26 revenue or FCF guidance, investors may continue to focus on valuation pressure, peer multiple compression, and the potential disruption from AI to consulting and software. Positive catalysts would come from a later full-year FCF raise, sustained software and consulting growth, and progress in generative AI and quantum commercialization; negative catalysts include macro and geopolitical risks, longer sales cycles, weak consulting orders, software growth below medium-term targets, and insufficient M&A contribution.

Risks

• If CY26 FCF cannot be raised, the 1Q EPS beat may fail to translate into a valuation catalyst.
• Software and consulting growth may fall short of the medium-term model, especially if organic software growth stays below the 7% target.
• AI may accelerate substitution or disrupt IBM's core consulting business, and may also affect Data and Automation.
• Rising macro and geopolitical risks could lengthen sales cycles and reduce consulting signings or orders, while weakening infrastructure demand.
• Hardware shortages and memory-cost inflation could affect infrastructure margins and demand timing.
• Insufficient M&A contribution or weaker-than-expected integration may fail to improve the software mix's relevance.
• Quantum commercialization may progress more slowly than the market expects, making the quantum valuation option hard to realize.
• The 2026 ELA cycle, mainframe cycle, or AI consulting orders may fall short of expectations.

What to watch

• IBM's 1Q26 results, due after the close on April 22, 2026, and whether they meet or exceed the $16.2B revenue and $1.91 EPS expectations.
• Whether management raises CY26 revenue, EPS, or FCF guidance, especially whether FCF is above $15.8B.
• Whether software revenue growth on a constant-currency basis comes close to or exceeds +9.9%, and the split between organic and inorganic contributions.
• Whether the improvement in Consulting hiring translates into signings, orders, and revenue growth.
• Whether Infrastructure shows demand pulled forward, and whether that borrows from 2H26 demand.
• Whether software, consulting, hardware, and quantum peer valuations continue to de-rate.
• Whether the sensitivity of roughly $7 per share for every $500M of FCF upside becomes a focus for the market going forward.
• Whether generative AI, quantum computing, and AI consulting orders provide better-than-expected commercialization evidence.