JPMorgan Sees Untapped Potential in IBM's Software Segment, Upgrades Stock

JPMorgan has shifted gears on International Business Machines, rating it overweight after a closer evaluation of IBM's software operations. The firm believes the market hasn't fully grasped the potential locked in IBM's software arm, prompting a price target boost from $270 to $291.

Analyst Brian Essex emphasized the importance of IBM's software business, which now accounts for about 45% of the company's revenue and roughly two-thirds of its consolidated profits. This shift favors recurring revenue streams and improved profitability, making software a more attractive part of IBM's overall earnings mix.

Essex pointed to four key software pillars driving IBM's growth: hybrid cloud, automation, transaction processing, and data. These elements are expected to create a compounding effect that underpins and justifies IBM's investments in infrastructure, reinforcing a robust business model.

The upgrade is based on expectations for an acceleration in software growth in the latter half of 2026, highlighting better margins and cash flow from this segment. Software's higher-margin nature contrasts with IBM's hardware and services businesses, which tend to have lower margins and cash conversion.

Despite the optimism from JPMorgan, the wider investor community's sentiment is mixed yet leaning positive: out of 25 analysts covering the stock, 15 recommend buying or strong buying IBM shares, per LSEG data.

Interestingly, IBM's shares have taken a hit this year, down about 15% to date. The stock's price action may reflect broader market skepticism or concerns about legacy businesses, even as the software division gains traction.

This fresh perspective from JPMorgan underlines the evolving story of IBM transitioning from its traditional hardware roots toward a software-centric growth engine. The enhanced forecast and improved margins suggest a well-balanced business with potential for durable earnings.

It remains to be seen how quickly the market will catch on to the value in IBM's shifting revenue mix and whether this could finally re-rate the stock after a rough start to the year.