IBM Stock Is Out Of Favor, But The Margin Commitment Never Came Down

The revenue guidance came down after the second-quarter miss; the operating pretax margin and free-cash-flow commitments did not.

International Business Machines (IBM) has traded essentially flat over the past year while the S&P 500 returned about 20%, and the shares now sit near 71% of their 52-week high. The company also cut its 2026 revenue growth guide after a fiscal Q2 2026 shortfall. The number worth arguing about is not the revenue line that slipped, but the profit commitment management did not move with it.

The Revenue Guide Came Down, And The 100-Basis-Point Margin Guide Did Not

The new revenue growth range is 4% to 5%, down from the 5%-plus management was defending in April. The company still expects 100 basis points of operating pretax margin expansion in 2026, matching the roughly one point it guided to in April, and still expects free cash flow to grow by about $1 billion, with productivity actions more than offsetting the revenue-related headwinds. Set against $69.1 billion of trailing-twelve-month revenue, that unchanged profit commitment is the more informative half of the guidance: the shortfall moved the sales line and management re-underwrote the profit line anyway.

From 14.4% To 18.4%, A Margin That Has Not Stopped Climbing

Operating pretax margin climbed steadily from 14.4% in 2023 to 15.5% in 2024, reached 17.1% in 2025, and now sits at 18.4% over the trailing twelve months. A pretax profit line that keeps widening while the top line disappoints is the part of the bull case with three years of history behind it. Margins that hold their direction like that are one of the properties the Trefis High Quality Portfolio favors in its holdings. Management describes its productivity program in operational terms: AI and automation deployed at greater scale across the company, third-party spend reduced, and AI used to make software development more efficient. In fiscal Q2 2026, that program landed unevenly, with Consulting segment profit margin up 160 basis points and Software up 110 basis points on those actions while Infrastructure fell 150 basis points on IBM Z mainframe mix.

Deferred or Destroyed Is Still the Question Margin Cannot Answer

None of this answers whether the demand is deferred or destroyed, and the margin case does not pretend to. Management says the software shortfall was limited to a capital-expenditure-sensitive corner of the portfolio: transaction processing revenue fell 9% while data grew 18%, after clients redirected spending toward servers, storage and memory ahead of expected price increases. That software is bought inside the enterprise license agreements clients sign alongside mainframes, so a budget shift away from mainframe deals and toward that other hardware pulls the software with it. About a third of the slipped deals closed in the first three weeks of fiscal Q3 2026, which management calls an indication rather than full evidence. The miss did cost something: operating gross profit margin fell 70 basis points in fiscal Q2 2026, largely on the revenue shortfall and mix. Productivity actions ran ahead of plan in the same quarter, and the operating pretax margin still expanded 30 basis points. So the case is not that margin cancels that question, but that the profit line widened through the quarter that raised it, which is worth weighing against how other beaten-down names have behaved after falls of this size.

A Cost Program This Steady Still Runs Inside One Company

Productivity can carry a profit line through a demand scare, but it cannot answer the demand question, and here the answer will come from clients. Holding that argument through a single position is a different proposition from a rules-based group of quality businesses like the Trefis High Quality Portfolio. That portfolio has a track record of outpacing the three major indices – the S&P 500, S&P Mid-cap, and Russell 2000.