Morgan Stanley sends warning on IBM stock after earnings | Official Website of Louis Velazquez, entrepreneur, finance guy and tech innovator

Morgan Stanley issued a cautious note on IBM (IBM) following its second-quarter earnings report, maintaining an Equal-Weight rating and reiterating its $253-per-share price target.

While the tech giant’s headline numbers seemed encouraging at a glance — including 8% year-over-year revenue growth, a 320-basis-point operating margin expansion, and a 15% jump in earnings per share — Morgan Stanley analyst Erik Woodring raised serious concerns about the sustainability of IBM’s growth trajectory heading into 2026.

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One weak spot in IBM’s ‘solid’ quarter

IBM delivered a strong quarter at face value; the company beat Wall Street’s expectations on both revenue and earnings per share, aided in part by a surprisingly robust performance from its mainframe business and better-than-expected gross margins.

Management also modestly increased the company’s free cash flow (FCF) guidance for 2025.

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But Woodring warns that the quality of the beat could mask underlying weaknesses. Organic software revenue, for example, grew just 3.5% year over year, well below the 7% to 8% growth IBM may need in the second half of the year to meet its own targets. Those targets were also set against tough year-over-year comparisons, noted the analyst, adding pressure to deliver a meaningful acceleration in the back half of 2025.

IBM’s consulting segment also continued to struggle. Industrywide headwinds, particularly driven by weak discretionary spending and prolonged project timelines, are weighing on growth.

Growing adoption of AI is also cannibalizing traditional consulting projects; Woodring noted that these trends are likely to persist, creating structural challenges for IBM’s services arm.

IBM CEO Arvind Krishna briefed analysts about the company’s quantum computing efforts.

Image source&colon; Bloomberg/Getty Images

On IBM’s cautious forward outlook

While the relative strength of IMB’s infrastructure business stood out, the analyst also elaborated that its outperformance could ironically set the company up for even more difficult year-over-year comparisons in 2026.

Woodring believes that unless UBM can either drastically accelerate organic software growth or make a meaningful acquisition, it seems likely that growth will decelerate in 2026. Any deceleration would almost certainly result in downside performance relative to consensus estimates, which in turn could result in compression of the valuation multiple IBM stock might command.

“In the absence of a sizable acquisition […] the probability that growth decelerates in 2026 rises post-Q2,” Woodring wrote. He added that the debate over IBM’s ability to deliver sustainable growth will likely dominate investor discussions in the second half of the year, with all eyes on the software segment’s performance.

In the end, Morgan Stanley maintained its price target of $253 per share on IBM stock, or roughly 3% downside from its latest closing price as of this writing, based on a valuation of roughly 16X estimated 2026 free cash flow.

So while IBM’s Q2 results were technically stronger than expected in some areas, Morgan Stanley is urging investors to tread carefully; with key segments including software and consulting under pressure and no immediate catalyst in sight, the firm believes IBM’s long-term growth outlook remains uncertain.

Investors betting on sustained momentum, then, may do well to recalibrate their expectations for IBM stock going forward.