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IBM Earnings Preview: AI, Cloud and What Traders Need to Know

By:Gus Downing

The company has been making unheralded progress in advancing artificial intelligence

  • IBM holds its Q2 FY2025 earnings call after the market closes tomorrow.
  • The company has had an amazing year and is outperforming competitors like Nvidia, Meta and Microsoft.
  • Catalysts that could move the stock post-earnings include AI spending, infrastructure upgrades, free cash flow and updates to full-year guidance.


IBM (IBM), once the undisputed leader in AI and computing development, stayed ahead of competitors with events like DeepBlue’s defeat of Garry Kasparov in 1996 and Watson’s legendary run on Jeopardy in 2011

That changed over the last 10 years, and IBM seemingly became an afterthought when it comes to AI. But despite a lack of hype in the media, the company has been on a tear in 2025, and its earnings call tomorrow has the potential to send the stock to higher highs or to put a firm stop to the momentum. 


Consensus forecasts and revenue segments to watch

Consensus estimates among analysts call for IBM to announce an earnings per share of $2.65 and revenue of $16.58 billion, increases of 9% and 5% year-over-year, respectively. 


Of that $16.58 billion in anticipated revenue, $7.43 billion is expected to come from IBM’s software segment, $5.2 billion from consulting and $3.75 billion from infrastructure — aided by AI-enabled demand for the company’s new z17 mainframe computer. 


Additional drivers include the status of IBM’s Power11 chips, which are expected to bolster AI infrastructure revenue, as well as continued strength from Red Hat and HashiCorp integrations. 


AI growth, mainframes and the roadblocks ahead

Four catalysts could drive growth for IBM, and four risks that could hamper it.

Catalysts:

  • AI and Hybrid Cloud: The strength of software has been a major driver of growth for IBM, especially AI automation and integration of Red Hat. Red Hat alone grew 13% in Q1.
  • AI Spending: AI budgets currently represent 12% to 15% of IBM’s IT budgets, which represents a 10% increase from Q1. Investors would likely interpret increased spending on AI as a good thing for the company.
  • Free Cash Flow: IBM saw $2 billion in free cash flow in Q1 and projects over $13.5 billion in total revenue for the fiscal year. $2 billion is obviously not one quarter of $13.5 billion, so investors will have their ears open for any changes in free cash flow this quarter. 
  • Z17 Mainframe: The z17 mainframe computer gives IBM a big infrastructure boost; any further announcements on optimization of this AI infrastructure have the potential to move the stock. 


Risks:

  • Consulting Weakness: Demand is softening for consulting, a major revenue segment for IBM — especially from delayed federal spending. If the company’s consulting revenue takes a dive, that would hurt the bottom line. 
  • Premium Valuation: IBM trades with a forward price-to-earnings (P/E) ratio of about 16.5x and a price-to-earnings (PEG) of about 3.7x, which means it’s particularly vulnerable to any slowdown or shift in sentiment. 
  • Debt and Dividend Pressure: Despite the solid free cash flow projections, IBM has high debt (its debt/EBITDA is about 4.4x) and a dividend payout exceeding free cash flow. Investors will be eager to hear how IBM is managing that debt and if any adjustments will be made to dividends. 
  • Macroeconomic and Competitive Headwinds: Federal budget cuts, strong hyperscaler competition, and macroeconomic concerns are issues plaguing all of the companies in this industry; updates to how IBM is navigating these risks and how heavily they are affected by them could move the stock. 


How IBM has reacted to past earnings and what that means now

As stated earlier, IBM has been on an absolute tear this year. The stock is currently trading up 29% year-to-date (YTD), dramatically outperforming the market and even outperforming peers like Nvidia, Meta and Microsoft (MSFT). This comes despite a slowdown in July when IBM has pulled back about 5%, testing the 50-day moving average. 


Over the past five years, IBM has moved positively after earnings calls 63% of the time, with a median move of 4.8% to the upside. Downside moves have come the other 37% of the time, with a median move of 6.6% to the downside. In all cases, forward guidance has been a bigger driver than actual earnings performance. 


IBM has been quietly making major headway in AI for years, and if that continues into the earnings call tomorrow, there is no reason it couldn’t make higher highs. However, should that trend slow down or if any clear indications are given that the competition is catching up, it could be detrimental to share price and set IBM back relative to competitors.


Gus Downingis host of the tastylive Network show Risk and Reward. @GainsByGus

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

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