IBM Stock Plunges on AI Threat From Anthropic: Time to Rethink?

International Business Machines Corporation IBM stock plummeted 20.6% over the past three months, lagging the industry’s 12.8% growth due to a sudden development in artificial intelligence (AI) that could threaten its core legacy businesses. The plunge was primarily triggered by an announcement from AI firm Anthropic that its Claude Code tool can modernize legacy COBOL systems — a foundational programming language deeply embedded in IBM’s mainframe ecosystem.

With Claude Code proposing to substantially automate code exploration, documentation, refactoring and security analysis, it threatened to reduce enterprises’ reliance on specialized legacy service providers like IBM, bringing its sustenance at stake. This is likely to redefine the competitive landscape, leading to a broad-based downslide across the sector. Peers like Microsoft Corporation MSFT and Amazon.com, Inc. AMZN declined 17.8% and 9.6%, respectively, over this period.

Three-Month IBM Stock Price Performance

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How Deep is the Threat for IBM?

IBM has long positioned itself as the dominant provider of mainframe systems optimized for high-volume, mission-critical workloads characterized by AI. Over decades, the company has built a durable revenue stream around maintaining, upgrading and modernizing legacy COBOL environments for large enterprises.

The complexity of COBOL systems has historically served as a competitive moat. Many organizations hesitate to rewrite or replace these systems due to cost, operational risk and the shrinking pool of developers familiar with the language. But it appears that the moat may now be facing AI-driven erosion.

COBOL remains deeply embedded in global infrastructure and continues to run in production daily across financial institutions, airlines, retailers and government systems. If Claude Code meaningfully reduces the cost and complexity of analyzing and migrating legacy systems, it could compress pricing power in IBM’s Consulting segment, introducing a new competitive dynamic into a space that has historically been a labor-intensive and high-margin business for the company.

Stiff Competition, Price Wars Hurt IBM

To add to the woes, IBM is facing stiff competition from Amazon Web Services and Microsoft Azure. Increasing pricing pressure is eroding margins, and profitability has trended down over the years, barring occasional spikes. The company’s ongoing, heavily time-consuming business model transition to the cloud is a challenging task. Weaknesses in its traditional business and foreign exchange volatility remain a significant concern.

IBM is resorting to massive job cuts to reduce operating costs. A significant part of these jobs was reportedly in India under a “resource action” plan, an ongoing corporate strategy to tap the vast talent pool of the subcontinent at lower operating costs. The cut largely affected employees from marketing and communications as the company focused on high-margin AI and software, boosting productivity with leaner teams.

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Down But Not Out

Despite the setbacks, IBM is poised to benefit from healthy demand trends for hybrid cloud and AI, which drive the Software and Consulting segments. The company’s growth is expected to be aided by analytics, cloud computing and security in the long run. A combination of a better business mix, improving operating leverage through productivity gains and increased investment in growth opportunities will likely boost profitability.

With a surge in traditional cloud-native workloads and associated applications, along with a rise in generative AI deployment, there is a radical expansion in the number of cloud workloads that enterprises are currently managing. This has resulted in heterogeneous, dynamic and complex infrastructure strategies, which have led firms to undertake a cloud-agnostic and interoperable approach to highly secure multi-cloud management, translating into a healthy demand for IBM hybrid cloud solutions. In addition, the buyout of HashiCorp has significantly augmented IBM’s capabilities to assist enterprises in managing complex cloud environments. HashiCorp’s tool sets complement IBM RedHat’s portfolio, bringing additional functionalities for cloud infrastructure management and bolstering its hybrid multi-cloud approach.

IBM’s watsonx platform is likely to be the core technology platform for its AI capabilities. watsonx delivers the value of foundational models to the enterprise, enabling them to be more productive. This enterprise-ready AI and data platform comprises three products to help organizations accelerate and scale AI: the watsonx.ai studio for new foundation models, generative AI and machine learning, the watsonx.data fit-for-purpose data store built on an open lake house architecture and the watsonx.governance toolkit to help enable AI workflows to be built with responsibility and transparency.

Estimate Revision Trend

IBM is currently witnessing an uptrend in estimate revisions. Earnings estimates for IBM for 2026 have moved up 1.1% to $12.37 over the past 60 days, while the same for 2027 has increased 1.8% to $13.30. The positive estimate revision portrays bullish sentiments about the stock’s growth potential.

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End Note

IBM has invested heavily in its own AI capabilities, including watsonx, and could incorporate generative AI into its consulting workflows to improve efficiency rather than lose relevance. A strong emphasis on quantum computing and hybrid cloud is driving value for customers. With improving earnings estimates, the stock is witnessing a positive investor perception.

However, IBM’s growth is dented by high operating costs and stiff competition that reduce its profitability. The company faces a potent threat from Anthropic and needs to fine-tune its business model to remain competitive. With a Zacks Rank #3 (Hold), IBM appears to be treading in the middle of the road, and new investors can be better off if they trade with caution. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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