IBM (IBM) is pinning its hopes for a 2026 rebound in mainframe computing demand after a shock warning on the second quarter sent the stock reeling. But there's a lot left to be determined.
Quick insight: When IBM reported second quarter earnings Tuesday evening, one thing stood out more than most. Fresh off a major sales warning a week ago, the company didn't provide a complete reset of full-year sales guidance — instead, it gave a modest markdown.
The outlook appears to hinge on improved demand for mainframe computing after IBM's business was dented by business leaders allocating more capital to AI-centric infrastructure, such as servers and chips.
It's a bold assumption by IBM, based on the strong demand for all things AI, which is likely to persist well into 2027.
"We do not see any evidence of clients getting off of mainframe," IBM CFO Jim Kavanaugh told Yahoo Finance. "So the key indicators for us that give us confidence in mainframe is that we expect a record year compared to prior programs in the high 120s. It's all driven off of what we're seeing capacity growth happening, the value proposition of AI inferencing that's happening, and the economic equation that will flip to us moving forward. So that's what gives us confidence."
Inside IBM's Q2 earnings:
Q2 net sales:+1% to$17.2 billion versus estimates for $17.2 billion. - Q2 diluted earnings per share:+5% to$2.93 versus estimates for $2.93. - 2026 outlook: IBM guided for full-year constant currency revenue growth in the range of 4% to 5%. Previously, it forecast full-year constant currency revenue growth of "more than" 5%.
As mentioned above, on July 14, IBM preannounced results that were well below consensus estimates for the second quarter, so expectations were already low heading into the latest report card. IBM said it saw second quarter sales of $17.2 billion versus the analyst estimates of $17.85 billion at the time. Non-GAAP earnings are expected to be $2.93 compared to estimates of $3.02.
Since the warning, Yahoo Finance AlphaSpace data shows that Wall Street has significantly slashed its earnings per share estimates for IBM for 2026 and 2027.
"We continue to view the stock as range-bound with a slight downward bias given low near-term visibility and seasonal dynamics," Stifel analyst David Grossman said in a note on Thursday.
The bottom line: IBM has a lot riding on a mainframe computing rebound. If it signals midquarter that this is, in fact, happening, it would go a long way toward restoring investor trust.