IBM Earnings: Healthy AI Traction, but Revenue Outlook Unchanged; Shares Overvalued

IBM’s second-quarter results beat all our expectations, while not rocking the boat on outlook. IBM’s software segment helped drive results, specifically in business transformation. Nonetheless, IBM wasn’t immune from consulting weakness throughout the IT services sector. We are maintaining our fair value estimate of $139 per share for the narrow-moat IT services provider, which leaves shares overvalued. While IBM’s generative artificial intelligence business is healthy, we weigh IBM’s AI growth prospects with a grain of salt. IBM’s Watson Health AI failure was not too long ago and, in our view, resulted from existing execution issues we still see throughout the firm. We continue to believe that there are more appealing opportunities in the IT services segment, such as Cognizant.