International Business Machines Corporation IBM is leaning harder into software, hybrid cloud and artificial intelligence to make its revenue base more predictable. That shift is improving visibility, but it has not removed exposure to enterprise budget timing.
The key investor question is whether recurring software streams and AI-related demand can offset near-term execution pressure and the uneven infrastructure cycle.
IBM Builds Around Recurring Software Revenue
Software is now the center of IBM’s business mix, accounting for 45.2% of GAAP revenues in second-quarter 2026. Segment revenues rose 5% in the quarter, while annual recurring revenue increased 8% to $24.6 billion.
That recurring base matters because about 80% of annual software revenues come from subscription, consumption and support streams. IBM expects Software revenues to grow 6%-8% in 2026 and now targets 100 basis points of operating pretax margin expansion for the year.
IBM Deepens Its Hybrid Cloud Portfolio
IBM’s hybrid cloud strategy rests on Red Hat, OpenShift and a broader set of software assets that help enterprises manage applications, data and workloads across complex environments. Red Hat revenues increased 11% in the second quarter, and OpenShift annual recurring revenue reached $2.2 billion.
HashiCorp and Confluent add more depth to that platform approach. HashiCorp posted record bookings, while Confluent remained on track after its first full quarter following the acquisition. Hybrid Cloud revenues rose 11%, and Data revenues advanced 18% on a constant-currency basis.
Microsoft Corporation MSFT remains a relevant comparison because Azure Arc is designed to run Azure artificial intelligence and data services across cloud and edge environments. Oracle Corporation ORCL also competes in the same enterprise modernization theme through multicloud deployments and AI database services.
IBM Consulting Turns AI Demand Into Backlog
IBM’s Consulting business is showing that enterprise AI work is moving beyond small experiments. Consulting signings rose 6% to $5 billion in the second quarter, marking a second straight quarter of growth.
Generative AI represented about half of Consulting signings and more than 30% of backlog. Revenue growth remained limited at 1% on a constant-currency basis, but segment profit rose 15.1%, and the margin expanded 160 basis points to 12.1%.
That mix suggests AI demand is present, but conversion into revenue remains gradual. IBM still expects Consulting revenues to grow in the low-to-mid-single-digit range in 2026, supported by backlog quality and enterprise transformation work.
IBM Faces Deal Timing and Mainframe Pressure
The second quarter also showed why the growth outlook remains exposed to enterprise spending shifts. Total revenues rose 1.1% to $17.16 billion but missed the Zacks Consensus Estimate of $17.32 billion by 0.9%.
The shortfall reflected delayed capital-expenditure-sensitive software transactions and weakness in IBM Z revenues. Clients redirected spending toward servers, storage and memory amid supply constraints and expected price increases.
Infrastructure revenues declined 7% year over year, with IBM Z revenues down 42%. Transaction Processing revenues fell 9% on a constant-currency basis, showing that recurring software strength does not fully shield IBM from infrastructure and enterprise license agreement timing.
IBM’s Mixed Scores Temper the Growth Story
IBM’s transformation remains credible, but the stock’s setup is not one-sided. Recurring software, Red Hat momentum, AI Consulting backlog and productivity actions support the case for steadier growth and margin leverage.
At the same time, delayed deals, mainframe volatility and acquisition-related balance sheet demands keep the story balanced. IBM currently carries a Zacks Rank #3 (Hold), which points to a more neutral near-term earnings revision backdrop.
The Value Score of C and Growth Score of C suggest neither valuation nor growth characteristics stand out strongly. The Momentum Score of D and VGM Score of D point to weaker share-price trends and limited near-term conviction across the combined style framework.
For investors, IBM’s 2026 outlook depends on execution. The software-led model gives the company a stronger base than in past cycles, but the stock still needs clearer evidence that AI demand and recurring revenue can absorb deal timing and infrastructure pressure.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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