Key Takeaways
IBM stock fell 8.6% in three months, underperforming industry growth of 9.8%.Margin pressure stems from price wars with AWS and Microsoft Azure.IBM eyes growth through hybrid cloud, AI demand and the watsonx platform.
International Business Machines Corporation (IBM Quick QuoteIBM – Free Report) has declined 8.6% over the past three months against the industry’s growth of 9.8% due to macroeconomic challenges. The stock has lagged peers like Microsoft Corporation (MSFT Quick QuoteMSFT – Free Report) and Amazon.com, Inc. (AMZN Quick QuoteAMZN – Free Report) . While Microsoft has gained 4.7%, Amazon has rallied 7.1% over this period, driven by the rising adoption of enterprise capabilities of Azure OpenAI and Amazon Web Services.
3-Month IBM Stock Price Performance
Image Source: Zacks Investment Research
Price Wars Hurt IBM Margin
IBM is facing 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 challenging. Weaknesses in its traditional business and foreign exchange volatility remain significant concerns.
IBM is resorting to massive job cuts to reduce operating costs. A significant part of these jobs is slated to be shifted to India under a “resource action” plan, an ongoing corporate strategy to tap the vast talent pool of the subcontinent at lower operating costs. Although the company spokesperson has refused to comment on the grapevines and commit an exact figure for the layoffs, various unidentified sources have confirmed that the action has already started, impacting employees from consulting, corporate social responsibility, cloud infrastructure, sales and internal systems teams.
A majority of job losses have also been reported in the Human Resource department as IBM aims to integrate AI (artificial intelligence) into its operations, particularly in back-office functions.
Image Source: Zacks Investment Research
Key Valuation Metric
From a valuation standpoint, IBM appears to be trading expensively relative to the industry and well above its mean. Going by the price/earnings ratio, shares of International Business Machines currently trade at 21.28X, higher than 19.96 for the industry and the stock’s mean of 14.05.
Image Source: Zacks Investment Research
Solid Hybrid Cloud, AI Demand: IBM’s Growth Drivers
International Business Machines is poised to benefit from healthy demand trends for hybrid cloud and AI, which drive the Software and Consulting segments. We expect the company’s growth to be aided by analytics, cloud computing and security in the long run. IBM is likely to benefit from a better business mix, improved operating leverage and higher investments in growth opportunities.
International Business Machines’ watsonx 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. These include the watsonx.ai studio for new foundation models, generative AI and machine learning, and the watsonx.data fit-for-purpose data store built on an open lake house architecture. It also includes the watsonx.governance toolkit to help enable AI workflows to be built with responsibility and transparency.
Estimate Revision Trend of IBM
IBM is currently witnessing an uptrend in estimate revisions. Earnings estimates for 2025 have grown 5.8% to $11.12 over the past year, while the same for 2026 has increased 6.1% to $11.93. The positive estimate revision portrays bullish sentiments about the stock’s growth potential.
End Note
With solid fundamentals and healthy revenue-generating potential driven by robust demand trends, IBM is witnessing a steady growth curve. A strong emphasis on hybrid cloud, diligent execution of operational plans and an AI focus are driving value for customers. With improving earnings estimates, the stock is witnessing a positive investor perception at the moment.
However, IBM’s growth is dented by high operating costs and stiff competition that reduce its profitability. It is also trading at a premium compared with the industry. 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.