Damo raised the target price of IBM (IBM.US) to $238 and remains neutral: Q3 performance is expected to be steady and under pressure in 2027

The Zhitong Finance App learned that on October 14, 2026, Morgan Stanley released the IBM (IBM.US) financial results outlook report for the third quarter of the 2026 fiscal year, and IBM will disclose financial reports after the US stock market on October 21. The report maintains an “Equal-Weight” (Equal-Weight) investment rating, raising the target price from $190 to $238, with only about 3% upside compared to the current share price of $227.88; the optimistic scenario is worth $350 (including quantum business value), and the pessimistic scenario is valued at $175.

The report points out that IBM's business environment for the third quarter was relatively clear, and the probability of performance was basically in line with the market's unanimous expectations. Orders delayed in the second quarter will confirm revenue in Q3, compounded by strong demand for server, storage, and tape hardware in the infrastructure sector, cost savings realized, and slight exchange rate benefits, which will support Q3 results.

By business, the software business is expected to increase 6.1% year on year with the support of non-endogenous revenue from the Confluent (CFLT.US) acquisition; the consulting business is dragged down by weak job data, and growth is almost stagnant. The fixed exchange rate caliber is expected to have zero year-on-year growth; the infrastructure business benefits from deferred orders, and the quarterly revenue decline will be significantly superior to historical seasonal performance.

According to agency estimates, IBM is expected to achieve revenue of US$16.823 billion in Q3, which is almost the same as market expectations; non-GAAP earnings per share of US$2.80 are 2% lower than the market's agreed expectation of US$2.86. The estimated revenue for the full year 2026 is US$70.191 billion and free cash flow of US$15.8 billion, basically maintaining the company's original guidelines. Q4, on the other hand, needed to achieve a month-on-month revenue increase of 3.9 billion US dollars, far exceeding the historical average seasonal increase of 2.6 billion US dollars over the past 12 years. Further order delays will directly impact quarterly results.

The real risk is concentrated in the fourth quarter of 2026 and 2027. The 2027 market requires IBM to achieve at least 5% fixed exchange rate revenue growth, which is difficult to achieve. On the one hand, mergers and acquisitions can only contribute 0.5 percentage points of growth, which is lower than the target of 1-2 percentage points per year; on the other hand, the mainframe business enters a downward phase, which will drag down the overall growth rate by about 1 percentage point in history, making it difficult for the consulting business to recover significantly. The software business needs to jump from an endogenous growth rate of 2% to 8% to 9% in 2026 to achieve the 10% growth target for management.

Morgan Stanley AlphaWise's European and American CIO research further revealed core concerns. 75% of mainframe customers plan to move some workloads off the mainframe within the next 24 months, and only 2% see the mainframe as the core of their AI strategy. On the generative AI circuit, IBM customer approval is low. Only 1% of CIOs will allocate more AI incremental budgets to IBM, and only 1% of companies use it as the preferred supplier for AI intelligent orchestration, making it difficult for AI to become the second growth curve. At the valuation level, IBM's current forward PE has reached 17.8 times, which is higher than the average of 16.7 times that of its software consulting peers, but the company's compound revenue growth rate is expected to be only 5%, and the valuation cost ratio is limited.

According to the report, the company's potential upward catalysts include order execution exceeding expectations, pre-confirmation of ELA contract renewal, acceleration of Red Hat business, cost cuts exceeding expectations, and quantum business commercialization breakthroughs; downside risks stem from further delays in orders, skewed ELA budgets towards hardware, weakening consulting sentiment, AI competition squeezing share, and accelerated mainframe customer migration. Judging from the overall judgment, there may be slight advantages in the Q3 financial report, but there are many medium- to long-term growth constraints. Quantum is only an option opportunity, so it maintains a neutral rating.