IBM’s Two-Speed Engine: Software Surges While Mainframe Drags the Stock Lower

IBM's mainframe sales plunged 42% as AI spending shifts, but software revenue rose 5%. Stock is oversold at €188.38, down 35.67% from its June peak.

IBM finds itself in an unusual position—simultaneously touting growth in its software business while grappling with a historic collapse in its legacy hardware division. The tension between these two realities has left the stock nursing a 27.5% year-to-date decline, even after a modest bounce on Friday that saw shares close at €188.38, up 3.74% from the previous session.

The rally offered a brief reprieve from the 52-week low of €175.14 hit just a day earlier, but the stock remains 35.67% below its June peak of €292.85. With the relative strength index sitting at 35.5, the shares are technically oversold, yet the path to recovery remains anything but clear.

The Mainframe Shock That Shook Confidence

The second-quarter results laid bare the scale of the challenge. IBM’s Z-series mainframe business cratered by 42%, a collapse that management attributes to customers diverting capital expenditure toward AI infrastructure—servers, chips, and related hardware. The company cut its full-year constant-currency revenue growth forecast to between 4% and 5%, down from the previous guidance of “more than 5%.”

CEO Arvind Krishna pushed back against speculation that IBM might need to break itself up, telling analysts on the earnings call that “our AI strategy is the right one for IBM” and that the company is “strongest as an integrated enterprise.” The finance chief echoed that sentiment, arguing that hybrid cloud, AI, and quantum computing form a cohesive foundation.

But not everyone is convinced. Stifel analyst David Grossman sees the stock stuck in a sideways-to-lower trading range, citing limited near-term visibility and seasonal headwinds. One portfolio manager put it more bluntly to Yahoo Finance, saying IBM has landed “in the penalty box” while it rejigs its business mix.

Software Offers a Counterweight

If the infrastructure business is the problem, software is increasingly the answer. The segment generated $7.76 billion in revenue during the second quarter, up 5% year over year. Red Hat stood out with an 11% acceleration, while the data business posted a 19% gain. Consulting held steady at $5.33 billion, even as infrastructure revenue slumped 7% to $3.84 billion—dragged down almost entirely by the mainframe implosion.

Total revenue came in at roughly $17.2 billion, and despite the lowered top-line forecast, IBM reaffirmed its commitment to boosting free cash flow by about $1 billion versus last year. That cash flow anchor is one reason some investors see value at current levels.

Krishna’s Bet on Returning Deals

Krishna offered a sliver of optimism, telling investors that roughly one-third of the delayed software deals have already come back. The question is whether that trend accelerates or stalls. The watsonx AI platform and the integration of the HashiCorp acquisition are meant to carry the narrative of a margin-rich, platform-driven future, but a 5% software gain isn’t enough to offset a double-digit infrastructure decline.

The market’s skepticism is baked into the stock’s 12-month slide of nearly 15%. The “new IBM” isn’t growing fast enough to outrun the “old IBM,” and until that changes, the shares are likely to remain under pressure.

The Macro Test Ahead

IBM doesn’t operate in a vacuum. The coming week brings earnings from the “Magnificent Seven”—Microsoft, Apple, and Amazon among them—which will set the tone for the entire tech sector. If those heavyweights confirm that IT budgets are migrating en masse toward AI infrastructure, it will be harder for IBM to sustain even its recent bounce.

The average analyst price target of €231.06 implies roughly 22% upside from Friday’s close. For the bulls, the immediate task is to defend the recent low and demonstrate that the software transformation can gain momentum even as the mainframe business faces structural headwinds. Krishna’s promise of returning deals will need to show up in hard numbers, not just conference call commentary, before the market gives IBM the benefit of the doubt.