IBM Corp. 1Q 2026 Earnings Preview: Can Software Business Withstand AI Wave’s Industry Impact?

TradingKey - IBM Corp IBM Corp is scheduled to report its first-quarter 2026 earnings after the bell on April 22, as the market continues to seek evidence that the company can sustain its growth momentum.

IBM's stock price has faced repeated setbacks this year, with a year-to-date decline of 13.86% as of April 20, a stark contrast to last year's 38% surge. This trend is primarily driven by the market's ongoing efforts to determine if AI will cause widespread disruption to software business models.

On February 23, hit by AI-driven panic selling, IBM shares plummeted 13.15% to close at $223.35, marking its largest single-day drop in nearly 25 years.

The sell-off was triggered by an article from AI startup Anthropic, which claimed its Claude Code tool could help modernize COBOL code. A significant portion of IBM's revenue is reportedly still tied to its mainframe business, and many of these servers run COBOL-based applications. Investors viewed the article as a prime example of AI dealing a heavy blow to the growth prospects of legacy enterprises.

The software business will be the primary highlight of the latest earnings results.

Historically, the market positioned IBM as a dividend-stable, low-growth software and technology stock. However, a stellar fourth-quarter earnings report last year returned the company to the growth stock category, with revenue rising 12% year-over-year to $19.7 billion.

The software business has become IBM's core growth engine, with revenue increasing 14% year-over-year, significantly improving the company's profit structure. Benefiting from this, the company's GAAP gross margin reached 60.6% in the fourth quarter of last year. It is noted that the software business is characterized by high gross margins, and its increasing share of revenue will drive improvements in the company's overall gross margin.

Furthermore, in the face of Microsoft and Google's intense competition in the consumer-grade general AI model space, IBM has carved out a differentiated enterprise AI path: leveraging its "software + consulting" hybrid cloud strategy to secure its position in the enterprise AI track, focusing on differentiated enterprise AI security and compliance scenarios, and implementing its consulting business through the watsonx strategy, which also drives high-margin software sales.

The software + consulting model involves IBM's consulting team entering first to design compliance solutions, then implementing those solutions into AI systems through software like watsonx. This distinguishes IBM from the model used by Microsoft and Google to capture individual consumers and lightweight enterprises: it avoids the "arms race" of model parameters and general capabilities. This approach primarily addresses the "how to use AI safely and compliantly" problem faced by enterprise clients.

Citi noted that although the enterprise software industry currently faces ongoing disruption from AI and the market environment is becoming increasingly unfavorable for traditional firms, IBM's deep software and hardware layout at core global IT infrastructure nodes, accumulated over multiple technology cycles, is both a moat against industry volatility and a key undervalued advantage—providing reliable underlying architectural support for building and scaling next-generation production-grade enterprise AI systems.

In summary, IBM is gradually breaking market stereotypes through the continued momentum of its software business. Following the earnings release, the actual growth rate of the software business will serve as the true test of this growth logic.

IBM Q1 Earnings Preview

Regarding market expectations, according to the latest FactSet survey, IBM's first-quarter revenue is expected to reach $15.63 billion, with adjusted earnings per share of $1.81, up 13% from a year earlier. Both figures exceed the $14.54 billion and $1.60 reported in the same period last year.

In terms of software growth, FactSet forecasts that IBM's software business will reach $6.98 billion in the first quarter, while infrastructure sales are expected to increase 8.5% year-over-year to $3.13 billion.

The market generally remains optimistic about IBM's outlook. Jefferies analyst Brent Thill noted that IBM's software business will benefit from Red Hat's growth momentum and the early closing of the Confluent acquisition. Thill further stated that IBM will prove to be an undervalued AI beneficiary, expecting first-quarter software growth to surpass Wall Street's 11% estimate. He reiterated a Buy rating on IBM with a price target of $320, implying an upside of approximately 26%.