Is IBM Still a Buy After the Recent Price Target Cut? Balancing Near-Term Concerns with Long-Term AI and Hybrid Cloud Potential

In the ever-shifting landscape of enterprise technology, IBM's recent stock volatility has sparked debate. A 7% drop in Q2 2025 followed a modest software revenue miss and a price target cut by Bank of America to $310. Yet, Melius Research and Wedbush maintain “buy” ratings, citing IBM's AI and hybrid cloud momentum. The question now is whether this dip reflects a temporary setback or a deeper structural issue—and whether the long-term potential justifies the current discount.

The Near-Term Headwinds: Software Growth Deceleration

IBM's software revenue, a cornerstone of its transformation, grew 8% in Q2 2025—solid but below the 10%+ expectations of many analysts. The drag came from transaction processing (TP) software, which lagged as clients prioritized z17 mainframe hardware. This cyclical issue, however, is not structural. The z17's 67% revenue surge in Q2 demonstrates its role as a catalyst for future software growth. Every $1 in mainframe hardware revenue pulls through $3–$4 in software, storage, and services over the product lifecycle, creating a durable flywheel.

Bank of America's price target cut to $310 reflects a 23x multiple, down from 24x, but this adjustment overlooks the z17's multiplier effect and the $7.5 billion GenAI book of business. Melius Research argues that TP software will rebound in H2 2025 as hardware deployments mature, while Wedbush notes that software revenue accelerated to 16% in constant currency, driven by Red Hat and Automation.

The Long-Term Play: AI and Hybrid Cloud as Structural Tailwinds

IBM's AI strategy is uniquely positioned to capitalize on enterprise demand. Its watsonx platform focuses on domain-specific, governed models—unlike hyperscalers' generic foundation models—targeting regulated industries where latency, compliance, and reliability matter. The GenAI book of business now exceeds $7.5 billion, with AI contributing over 10% of Consulting revenue. Tools like Watsonx Orchestrate, which allows users to build custom AI agents with minimal coding, are democratizing enterprise AI adoption.

Hybrid cloud, IBM's other pillar, is gaining traction. Red Hat's OpenShift ARR hit $1.7 billion, while HashiCorp's integration is boosting automation. IBM's z17 mainframe, equipped with Telum II processors for sub-millisecond AI inferencing, is a differentiator in financial, telecom, and government sectors. These innovations are not just incremental—they're foundational to the $647.6 billion cloud AI market by 2030.

Competitive Positioning: Niche vs. Broad

While AWS and Microsoft dominate public cloud infrastructure, IBM is carving a niche in hybrid and multi-cloud environments. Its strength lies in governance, compliance, and data sovereignty—factors critical to regulated industries. IBM's forward P/E of 25.05 is lower than Amazon's 33.38, suggesting undervaluation relative to its peers. Analysts like Dan Ives of Wedbush argue that IBM's ecosystem-driven approach—deepening integrations with Oracle, AWS, and Salesforce—positions it to capture incremental market share.

Risk vs. Reward: Is the Dip a Buying Opportunity?

The near-term dip in software growth is a red flag for some, but the broader narrative is one of transformation. IBM has shifted from a services-led to a software-led model, with software now representing 45% of revenue. Annual Recurring Revenue (ARR) grew 10% to $22.7 billion, driven by high-retention contracts. The z17 cycle and GenAI adoption are expected to drive margin expansion, with EBITDA up 16% in Q2 and full-year free cash flow guidance raised to $13.5 billion.

Critics warn of margin compression and execution risks in scaling GenAI. Yet, IBM's cross-portfolio synergies—SAP on Power11, Quantum System Two in Japan, and AI-embedded workflows—suggest a durable growth story. The recent dip offers a discount to intrinsic value for investors who can see beyond short-term volatility.

Conclusion: A “Buy” in the AI Era

IBM's current valuation discounts its long-term potential. While the software growth slowdown is a near-term headwind, it is cyclical, not structural. The z17 mainframe cycle, GenAI momentum, and hybrid cloud innovations are structural tailwinds that justify the “buy” ratings from Melius, Wedbush, and others. For investors with a 3–5 year horizon, IBM's strategic pivot to enterprise AI and hybrid cloud offers a compelling entry point.

Investment Advice: Buy on weakness, with a focus on the z17 and GenAI-driven growth catalysts. Monitor software recovery in H2 2025 and the integration of HashiCorp to assess execution risks. IBM's ability to monetize AI at the platform level and leverage its ecosystem could solidify its position as a durable compounder in the AI era.