IBM's "cautious" guidance leading to polarization on Wall Street: Wedbush lowers target price, but Morgan Stanley remains optimistic.

Notice that IBM stock price fell by about 8% in pre-market trading on Thursday. Prior to this, the company's "cautious" performance guidance did not meet investors' expectations for an upward revision. IBM reiterated its full-year performance forecast, with first-quarter performance exceeding Wall Street's expectations, but the company failed to alleviate investors' concerns about the potential impact of artificial intelligence on its business. The management's reiterated outlook for 2026 - revenue growth of over 5% in constant currency and an increase of $1 billion in free cash flow - was not adjusted due to the early completion of acquisitions. This conservative stance was interpreted by some investors as indicating that, even with the injection of new business, management still has difficulty ensuring full mitigation of the potential impact of AI on traditional business. The company reported that software revenue for the quarter ended March 31 increased by 11% to $7.05 billion, slightly higher than the expected $7.02 billion. Total revenue increased by 9% to $15.9 billion, higher than analysts' average expectations of $15.7 billion. Adjusted earnings per share were $1.91, also higher than expected. Wedbush maintained its "outperform" rating but lowered its target price for the stock from $340 to $320. Analysts led by Dan Ives stated, "IBM's first-quarter fiscal 2026 earnings report showed revenue and profit exceeding expectations, while maintaining the outlook for full-year revenue and free cash flow for fiscal 2026. Despite the strong performance and increasing demand for artificial intelligence in the software services sector, in the face of macroeconomic headwinds, the company has adopted a cautious strategy. We maintain our 'outperform' rating, but lower the target price from $340 to $320 to reflect the dilutive impact of Confluent's $600 million and recent softness in consulting business." IBM CFO James Kavanaugh stated during the earnings conference call, "Given the stage of the year we're in, we believe that even though we've had an exciting start with the underlying performance and execution, maintaining the current guidance is a prudent move." Analysts noted that as IBM plans to focus more on its software verticals, the company has maintained its revenue target of over 5% growth in constant currency for the full year of 2026. The software business is expected to grow by 10% in 2026, "as the company remains cautious given the difficult macroeconomic environment." Analysts added that IBM indicated that macro uncertainty may lead to reduced project spending by enterprises, making the company more hesitant to raise guidance. "We continue to believe that IBM is well-positioned to capitalize on the wave of AI demand, with its diversified portfolio and products gaining attention, and its productivity flywheel providing an opportunity to expand profit margins while investing in innovation," Ives and his team stated. Morgan Stanley maintained a "hold" rating on IBM stock but raised its target price from $215 to $225. Analysts led by Eric Woodring stated, "This earnings report largely meets our expectations for the quarter - the first quarter slightly exceeded expectations, the second-quarter guidance was in line with expectations, and the full-year outlook remains unchanged. Overall, there is nothing inappropriate or negative about this result, especially considering the uncertainty of the evolving Middle East conflict. However, we believe that investors had anticipated upward pressure on full-year estimates, which was not realized in this quarter."