IBM Earnings on Deck: Can Software and AI Momentum Justify the Rally?

IBM enters its Q2 2025 earnings report on Wednesday evening riding a 28% year-to-date rally, fueled by optimism around its AI strategy, software growth, and the upcoming z17 mainframe launch. However, despite this momentum, analysts see a tough near-term setup due to the stock’s stretched valuation and macroeconomic uncertainty, particularly around consulting. The company has become a favorite among defensive tech investors, but with shares up sharply, the burden of proof lies in IBM’s ability to demonstrate accelerating growth—especially in the higher-margin software segment and through its expanding generative AI offerings.

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Analysts expect IBM to report Q2 revenue of $16.59 billion, up 5% year-over-year, marking its first quarter of 5%+ revenue growth since September 2023. EPS is projected at $2.64, up 9%, with operating income forecast to rise 11% to $3.19 billion. IBM maintained full-year guidance for over 5% constant currency revenue growth and $13.5 billion in free cash flow, with FX expected to shift from a 200bps headwind in Q1 to a modest tailwind in Q2. The market will be closely watching for sustained strength in the software segment—particularly Red Hat, which is expected to deliver mid-teens growth—and signs that recent acquisitions like HashiCorp and DataStax are integrating well and driving incremental demand.

The software segment, forecast to generate roughly $7.4 billion in Q2, remains the focal point of the bull case. Growth here slowed last quarter to 7% from 10% in Q4, raising questions about momentum. Investors will also be tracking traction in IBM’s $6 billion GenAI book of business, which includes over 70 AI-infused workflows. Jefferies recently noted continued modernization tailwinds benefiting Red Hat and automation, though Microsoft and Oracle are still growing faster in relative terms. On the infrastructure side, revenue is expected to grow 3% to $3.75 billion, as IBM begins ramping its AI-enhanced z17 mainframe cycle. Consulting, meanwhile, remains the question mark. Revenue is forecast to decline 1% to $5.17 billion, with concerns around exposure to federal contracts and discretionary pullbacks weighing on sentiment.

In Q1, IBM posted revenue of $14.5 billion, up 2% in constant currency, alongside a 12% jump in adjusted EBITDA and a record $2 billion in Q1 free cash flow. Software revenue climbed 9%, led by Red Hat (+13%) and automation (+15%). Infrastructure fell 4% as the z16 cycle faded, while consulting was flat but showed sequential improvement. Management reaffirmed guidance for 5%+ revenue growth in 2025 and remained upbeat on second-half tailwinds from the z17 launch and new software contributions. While Q1 results demonstrated solid execution and margin expansion, shares fell 7% post-earnings as investors questioned the pace of AI monetization and macro exposure in consulting.

Looking ahead, IBM must prove that recent software investments and its GenAI positioning can offset any short-term macro drag. Analysts remain split: bulls see upside from software re-acceleration, mainframe strength, and improved FCF conversion, while skeptics point to decelerating Red Hat growth, lingering valuation concerns, and muted consulting trends. With the stock trading around 15x 2026 FCF and yielding 6% on a free cash flow basis, the setup may still appeal to long-term investors—but it may take another beat-and-raise quarter to keep the momentum going.