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- IBM 3Q25 - Mixed signals. Beat and raise with disappointing outlook? Bull case $380 Bear case $210
IBM 3Q25 - Mixed signals. Beat and raise with disappointing outlook? Bull case $380 Bear case $210
Cheat Sheets
INTERNATIONAL BUSINESS MACHINES (IBM)
📊 Highest Growth In Years | Revenue +7% (All Segments Accelerate) | Software +9% | Automation +22% | Infrastructure +15% | Consulting +2% (Returns to Growth) | Gen AI Book $9.5B+
Red Hat +12% | z17 Strongest Feb Launch Ever | Spire Accelerator Q4 Launch | $4.5B Annual Productivity Run Rate (2x Goal) | FCF Guide Raised to ~$14B | Revenue Guide Raised to >5% | 1,000+ Client Zero Engagements
💰 Market Cap: $268B | 🏢 293K+ Employees | 🌍 280+ Partners
👨💼 CEO Arvind Krishna | 🎯 Consulting Backlog $31B (+4%) | 🇺🇸 Armonk, NY
$268.50
📉 -$19.01 (-6.61%) After Hours
+23% YTD | Q3 2025 Post-Earnings Sell-Off
Price Targets (12-18 Months)
Current Price: $268.50 (After Hours)
$380.00
Bull Case (+42%)
2027 EPS: $15.50 | P/E: 24.5x
AI Revenue Acceleration
🚀 Needs:
Gen AI book converts to $5B+ annual revenue by 2027 • Automation sustains 20%+ growth with AI infusion • Red Hat accelerates to high teens (OpenShift +40%, Virtualization $700M pipeline) • Watson X Orchestrate becomes enterprise agentic AI standard • Consulting grows above market (backlog $31B, Gen AI 22% of backlog) • Infrastructure maintains momentum (z17 strongest launch, Spire Accelerator adoption) • Productivity reaches $6B+ run rate • Project Bob scales (8,000 devs, 45% gains) • Quantum partnerships drive commercial use cases
$330.00
Base Case (+23%)
2027 EPS: $14.00 | P/E: 23.5x
Sustained Acceleration
⚖️ Needs:
Revenue grows >5% (2025 guide raised) with mid-single digit growth sustained • Software 8-10% (Red Hat low teens, Automation high teens) • Consulting returns to market growth (backlog healthy at $31B) • Infrastructure maintains momentum from z17 cycle • Gen AI book grows to $12-14B, gradual revenue conversion • FCF $14B (2025 guide raised) trending toward $15B+ • Productivity gains reach $5B run rate • HashiCorp integration continues accelerating$210.00
Bear Case (-22%)
2027 EPS: $10.50 | P/E: 20x
Growth Stalls
⚠️ Risk:
Gen AI book ($9.5B) fails to convert to meaningful revenue growth • Software growth decelerates below 5% • Red Hat faces intensifying hyperscaler competition • Consulting backlog quality deteriorates (signings down 5% for 6th time in 6 quarters) • Infrastructure cycle peaks early, z17 momentum fades • AI productivity gains plateau • Macro uncertainty returns (Arvind: "always macro uncertainties") • Competition from hyperscalers, Anthropic, others in enterprise AI • Revenue growth slows to flat/negative
The TL;DR
💰
What Happened
REVENUE ACCEL: +7% growth, highest in several years, all segments accelerated sequentially
Software: +9%, Automation +22%, HashiCorp accelerating
Consulting: +2%, "marked inflection point" back to growth
Infrastructure: +15%, z17 "strongest February launch in history"
Gen AI: $9.5B book ($7.5B consulting, ~$2B software), 1,000+ client zero engagements
GUIDANCE RAISED: Revenue >5%, FCF ~$14B (both raised)
Software: +9%, Automation +22%, HashiCorp accelerating
Consulting: +2%, "marked inflection point" back to growth
Infrastructure: +15%, z17 "strongest February launch in history"
Gen AI: $9.5B book ($7.5B consulting, ~$2B software), 1,000+ client zero engagements
GUIDANCE RAISED: Revenue >5%, FCF ~$14B (both raised)
📉
Why It Matters
Broad Momentum: ALL segments accelerated = validation of hybrid cloud/AI strategy
Consulting Inflection: Back to growth after 6 quarters of declining signings
Productivity Surprise: $4.5B run rate vs $2B goal = 2.25x target, AI driving efficiency
Red Hat Quality: OpenShift +40%, Ansible +20%, Virtualization $700M pipeline
Beat & Raise: Management confidence = raised both revenue AND FCF guidance
Consulting Inflection: Back to growth after 6 quarters of declining signings
Productivity Surprise: $4.5B run rate vs $2B goal = 2.25x target, AI driving efficiency
Red Hat Quality: OpenShift +40%, Ansible +20%, Virtualization $700M pipeline
Beat & Raise: Management confidence = raised both revenue AND FCF guidance
🎯
Management Strategy
AI Everywhere: Infusing all products, "technology remains key driver of growth"
Client Zero: 1,000+ engagements, Project Bob (8,000 devs, 45% productivity gains)
Watson X: Orchestrate for agentic AI, hybrid model approach (Granite 4.0, Claude, Groq partnerships)
Productivity: "Significant opportunity ahead to become leaner and nimbler"
Quantum: First error-corrected computer by 2028, Europe's first System Two launched
Client Zero: 1,000+ engagements, Project Bob (8,000 devs, 45% productivity gains)
Watson X: Orchestrate for agentic AI, hybrid model approach (Granite 4.0, Claude, Groq partnerships)
Productivity: "Significant opportunity ahead to become leaner and nimbler"
Quantum: First error-corrected computer by 2028, Europe's first System Two launched
⚠️
Key Concerns
Signings Weakness: Consulting signings down 5%, "down 5 in last 6 quarters"
Revenue Conversion: Gen AI 22% of backlog, 30% of signings, only 12% of revenue = lag
Red Hat Sequential: Down couple points Q/Q, consumption headwinds ~2 points Q4
Backlog Realization: CFO: "Lot of work still to go to sell and bill within quarter"
Macro Risk: Arvind: "always macro uncertainties" despite optimism
Revenue Conversion: Gen AI 22% of backlog, 30% of signings, only 12% of revenue = lag
Red Hat Sequential: Down couple points Q/Q, consumption headwinds ~2 points Q4
Backlog Realization: CFO: "Lot of work still to go to sell and bill within quarter"
Macro Risk: Arvind: "always macro uncertainties" despite optimism
🐂 Bull Thesis
📈
Automation Explosion + Software Mix
Automation +22%: "End to end portfolio of leading solutions that optimize operations, automate infrastructure and workflows"
AI Infusion: "Many automation products infused with AI enhancing their capabilities"
HashiCorp Synergy: "Continues to accelerate within IBM, benefiting from go to market distribution and joint product innovation"
AI Infusion: "Many automation products infused with AI enhancing their capabilities"
HashiCorp Synergy: "Continues to accelerate within IBM, benefiting from go to market distribution and joint product innovation"
💰
Productivity Machine (2.25x Goal)
Crushing Targets: $4.5B annual run rate vs $2B goal = extraordinary execution
Arvind: "Significant opportunity ahead of us to continue to become even leaner and more nimble"
Client Zero: 1,000+ engagements, Project Bob with 8,000 devs showing 45% productivity gains = proof of concept
Arvind: "Significant opportunity ahead of us to continue to become even leaner and more nimble"
Client Zero: 1,000+ engagements, Project Bob with 8,000 devs showing 45% productivity gains = proof of concept
🎬
Infrastructure Roaring Back
+15% Growth: "z17, our strongest February launch in history"
Spire Accelerator Q4: "Advanced generative AI and real-time inferencing capabilities inside IBM Z, redefining how enterprises capture AI value"
Client Wins: Nationwide, State Street, Credit Agricole using z17 for AI inferencing and enhanced resiliency
Spire Accelerator Q4: "Advanced generative AI and real-time inferencing capabilities inside IBM Z, redefining how enterprises capture AI value"
Client Wins: Nationwide, State Street, Credit Agricole using z17 for AI inferencing and enhanced resiliency
💪
Consulting Inflection + Healthy Backlog
Back to Growth: +2% after multiple flat/down quarters, CFO: "marked inflection point"
Backlog $31B: Up 4%, "best ever erosion in multiple years" = client commitment to IBM, quality delivery
Gen AI Mix: 22% of backlog, 30% of signings, 12% of revenue = growing fast, 300+ new clients YTD
Backlog $31B: Up 4%, "best ever erosion in multiple years" = client commitment to IBM, quality delivery
Gen AI Mix: 22% of backlog, 30% of signings, 12% of revenue = growing fast, 300+ new clients YTD
🐻 Bear Thesis
📉
Signings Red Flag Persists
Chronic Weakness: Signings down 5%, CFO Jim: "down 5 in the last six quarters"
Renewal Excuse: "Driven down by lower large deal renewal volume" = concerning pattern
Leading Indicator: While backlog healthy now, persistent signings weakness could catch up = future revenue risk
Renewal Excuse: "Driven down by lower large deal renewal volume" = concerning pattern
Leading Indicator: While backlog healthy now, persistent signings weakness could catch up = future revenue risk
💸
Gen AI Revenue Conversion Gap
Book vs Revenue: $9.5B book, but Gen AI only 12% of consulting revenue = when does it scale?
Backlog Lag: 22% of backlog, 30% of signings but only 12% revenue = "lot of work still to go to sell and bill"
Quality Question: CFO focused on "quality" of signings over volume = are they booking low-margin work?
Backlog Lag: 22% of backlog, 30% of signings but only 12% revenue = "lot of work still to go to sell and bill"
Quality Question: CFO focused on "quality" of signings over volume = are they booking low-margin work?
🤖
Red Hat Sequential Decline
Q/Q Down: 12% growth, down "couple points quarter to quarter" despite year acceleration
Q4 Headwind: Consumption services ~2 point headwind in Q4, grew high teens last year = tough compare
RHEL Deceleration: 50% of portfolio, grew abnormally mid teens, reverted to 6% model growth = normalization or weakness?
Q4 Headwind: Consumption services ~2 point headwind in Q4, grew high teens last year = tough compare
RHEL Deceleration: 50% of portfolio, grew abnormally mid teens, reverted to 6% model growth = normalization or weakness?
⏰
Macro Risk + AI Competition
Arvind Caution: "There are always macro uncertainties" despite optimism = hedging language
Hyperscaler Threat: Watson X needs Anthropic/Groq partnerships = can't compete alone vs AWS, Azure, GCP AI
Execution Risk: Productivity gains = headcount cuts, if growth slows = margin pressure returns, no revenue offset
Hyperscaler Threat: Watson X needs Anthropic/Groq partnerships = can't compete alone vs AWS, Azure, GCP AI
Execution Risk: Productivity gains = headcount cuts, if growth slows = margin pressure returns, no revenue offset
This analysis is for informational purposes only and should not be considered investment advice. Please consult with a financial advisor before making investment decisions.
