IBM (IBM.US) presented its Q2 results yesterday after market close. Although most of the results exceeded expectations, the key software segment significantly underperformed, raising doubts about the company's prospects for raising revenue forecasts in H2 2025.
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In reaction to the results, we saw the largest single-day drop in the company's stock in over a year. The stock lost more than 7% in today's session, and at its peak, it was down by 11%. This means IBM's stock has fully erased all gains built since early June.
Today's IBM drop exceeds the declines seen after "Liberation Day." Source: Bloomberg Finance L.P.
The company's results showed solid revenue growth to $16.98 billion (+7.7%), supported by an improvement in adjusted gross margin to 60.1% (from 57.8% a year earlier). While the company reported solid baseline results, investors often look deeper into individual segments. In IBM's case, one of the most disappointing factors for investors was the software segment, which grew by 9.6% year-on-year to $7.39 billion, $0.1 billion lower than consensus forecasts.
The weakness of this sector casts doubt on the company's prospects for maintaining strong revenue dynamics in the second half of 2025. As this remains the main driver of IBM's results, this information was enough to push the stock down by as much as 7%.
Q2 2025 Results:
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Revenue: $16.98 billion, up 7.7% year-on-year (estimates: $16.59 billion)
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Software Revenue: $7.39 billion, up 9.6% year-on-year (estimates: $7.49 billion)
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Consulting Segment Revenue: $5.31 billion, up 2.6% year-on-year (estimates: $5.21 billion)
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Infrastructure Revenue: $4.14 billion, up 14% year-on-year (estimates: $3.66 billion)
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Financing Revenue: $166 million, down 1.8% year-on-year (estimates: $174.4 million)
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Other Revenue: -$31 million compared to $38 million year-on-year
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Adjusted Gross Margin: 60.1% compared to 57.8% year-on-year (estimates: 58.3%)
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Adjusted EPS: $2.80 compared to $2.43 year-on-year (estimates: $2.62)
At the same time, the company did not raise its cash flow expectations, which the consensus had anticipated. This move added some uncertainty to investors' predictions regarding the company's prospects.
The price of a high valuation
While IBM's results remain solid, the market's reaction is partly supported by the company's high valuation. Like the entire US market, the company entered the earnings season with elevated indicators, whose value exceeded not only the averages for the last year but was also at its highest level just before the company's results in over 3 years.
Thus, any blemishes on the company's business prospects strongly affect market sentiment, as we see in today's session. At the same time, even after such a sharp decline, the indicators remain above the averages for the last year, which, relative to historical valuation, leaves room for a possible deepening of the correction if the Q2 2025 results lead to a reduction in expectations regarding the company's performance later in the year.
P/E (blue), P/S (red), and EV/EBITDA (purple) ratios reached their highest values in the session preceding the results in over 3 years. Source: Bloomberg Finance L.P.
