IBM 1Q26 results were broadly in line with expectations; valuation raised but rating maintained at Equal-weight

Overview

This report is Morgan Stanley's review of IBM's 1Q26 earnings. The core conclusion is that IBM's quarterly performance was broadly in line with the prior preview: a slight beat, 2Q guidance close to market expectations, and unchanged full-year revenue and FCF guidance. The report believes this is not enough to materially change the market narrative on IBM, so it maintains an Equal-weight rating while raising the price target from $215 to $225 due to a modest expansion in peer valuation multiples.

Core views

Morgan Stanley believes IBM's current investment case is in balance. On one hand, the company has executed more consistently in recent years, with its mix shifting toward more recurring Software and Services, while the HashiCorp acquisition, the mainframe cycle, the ELA cycle, and Quantum all provide upside optionality. On the other hand, the current valuation is at a relatively high level, growth in Software and Consulting still needs validation, and whether FCF will be raised during the year remains a key variable affecting market sentiment.

Analysis framework

The report evaluates IBM by combining actual 1Q26 results, management guidance for 2Q and the full year, Morgan Stanley ModelWare forecasts, Refinitiv consensus estimates, segment revenue performance, cost control, FCF valuation multiples, and risk-reward scenario analysis. The valuation is centered on a P/FCF framework and compares the base-case target price with bull and bear scenarios.

Methodology notes

• Valuation methodsP/FCF valuation

  Derives the target price using CY26 FCF/share and the target P/FCF multiple.

  The base-case price target of $225 corresponds to about 14x CY26 FCF/share of $16.52; the bear-case scenario of $170 corresponds to 10.6x CY26 FCF/share of $16.02; the bull-case scenario of $440 incorporates a larger value contribution from Quantum.

• ForecastingMorgan Stanley ModelWare

  Morgan Stanley's internal forecasting model.

  The report states that, unless otherwise noted, metrics are based on Morgan Stanley ModelWare, and MSe represents Morgan Stanley Research estimates.

• Consensus expectationsRefinitiv Estimate consensus methodology

  Uses Refinitiv consensus estimates as the reference for market expectations.

  The report compares IBM's 1Q26, 2Q26, and CY26 revenue, EPS, and other metrics against market consensus estimates and Morgan Stanley forecasts.

• Risk/rewardBull/Base/Bear scenario analysis

  Measures risk/reward through bull, base, and bear scenarios.

  The base case emphasizes stable fundamentals and FCF growth; the bull case emphasizes upside from Quantum, Gen AI, Software, and Consulting; the bear case emphasizes macro, RHT share loss, M&A integration, and Consulting execution risks.

Asset mapping & comparison

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

• IBM.US

  Covered company; core subject of the report

  Strengths

  Strong Infrastructure performance, with a solid start to the z17 cycle; Red Hat growth better than expected; strong cost-saving capability; a more recurring mix of Software and Services; Quantum provides long-term upside optionality.

  Weaknesses

  Software overall came in below Morgan Stanley expectations; organic growth in Automation may decline; Consulting revenue growth was only 1% Y/Y CC; strong mainframe performance has not yet translated into clear uplift for Transaction Processing, Support, and Consulting.

  Comparison

  The base case believes IBM is roughly in line with Software and Consulting peers on a growth-adjusted basis; the target multiple references the relationship between peer P/FCF and FCF growth.

  Risks

  Macro shocks leading to longer deal cycles; European growth affected by a prolonged Middle East conflict; RHT share loss; M&A failing to improve Software portfolio relevance; AI disrupting core Consulting; FCF and margins below expectations.

Key data

• Price target change$225 from $215The price target increase mainly comes from a modest expansion in peer multiples, while the full-year FCF outlook is unchanged.
• RatingEqual-weight1Q26 results did not materially change IBM's upside or downside narrative.
• Closing price$251.86As of 2026-04-22.
• Implied return-10.7%Roughly calculated based on the $225 price target and the $251.86 closing price.
• CY26 revenue forecast$71.8BMorgan Stanley's updated forecast, previously $72.0B.
• CY26 EPS forecast$12.33Morgan Stanley's updated forecast, previously $12.28.
• Base-case valuation14x CY26 FCF/share $16.52The report says this yields a price target of $225.
• Infrastructure growth+11.8% Y/Y CCDriven by the z17 cycle and strong performance in Storage and Servers, 7% above Morgan Stanley's expectation.
• Mainframe growth+48% Y/YHowever, the related flywheel effect was not fully reflected this quarter.
• Transaction Processing growth+2% Y/Y CCTP growth slowed despite strong mainframe performance.
• Infrastructure Support growth-6% Y/Y CCBelow the prior quarter's -2% Y/Y.
• Consulting growth+1% Y/Y CCBookings returned to growth, but revenue growth remained modest.
• Software revenue3% below MSeRed Hat was better than expected, while Automation was below expectations.
• FY26 revenue guidance5%+ Y/Y at CCManagement maintained it unchanged.
• FY26 FCF guidanceex-financing receivables approximately +$1B Y/YManagement maintained it unchanged.

Impact & implications

In the short term, the report may limit the market's room to imagine post-earnings upward revisions for IBM because full-year revenue and FCF guidance were not raised, and the price target is below the current share price. In the medium term, investors need to watch whether FCF is delivered or raised, whether Software growth recovers, whether the z17 mainframe cycle brings broader stack multiplier effects, and whether Quantum commercialization can translate into valuation re-rating.

Risks

• Software and Consulting growth below the medium-term model.
• Margin pressure affecting EPS and FCF.
• Macro disruptions leading to longer customer deal cycles or budget cuts.
• If the Middle East conflict persists, it could affect European growth in the coming weeks.
• The mainframe cycle may fail to deliver the expected 3-5x stack multiplier effect.
• RHT growth slowdown or share loss.
• M&A may fail to improve Software portfolio relevance, or M&A contribution may be insufficient.
• AI may substitute for or disrupt the core Consulting business.
• Quantum commercialization may fall short of market expectations for valuation re-rating.

What to watch

• FCF generation and whether full-year guidance is raised during the year.
• IBM THINK (May 5) and its updates on AI, Software, Consulting, and Quantum strategy.
• RHEL growth performance amid server supply and memory shortage conditions.
• Whether the z17 cycle subsequently drives growth in Transaction Processing, Infrastructure Support, and Consulting.
• Divergence among Automation, Data, Transaction Processing, and Red Hat within Software.
• Whether the recovery in Consulting bookings can convert into revenue growth.
• Whether European demand is affected by the continuation of the Middle East conflict.
• Revenue contribution, dilution, and cost synergies after HashiCorp consolidation.