IBM
Founded in 1911 as the Computing-Tabulating-Recording Company, later became IBM in 1924. IBM has been playing the game from punch cards to mainframes, PCs, Cloud, and now generative AI. IBM now operates in over 175 countries, serving governments, Fortune 500 companies, and mission-critical infrastructure where downtime is unacceptable. If Microsoft owns the office, Amazon owns the cloud, and Nvidia owns the GPU layer, IBM owns the backbone, the part of the digital world that can never fail. IBM's evolution is going from hardware to hybrid cloud and AI services that enable a 100-year-old enterprise to produce frontier tech. IBM's current leadership team has been making moves, spinning off Kyndril, acquiring Red Hat, HashiCorp, and beginning to streamline operations to rebuild the company’s growth profile. This isn’t a rebrand but a refocus around AI that works in production.
IBM’s mission is no longer to invent technology for the future, but to make the future operationally viable for global enterprises already struggling with complexity. IBM is betting the chips on hybrid cloud and AI integration, not cloud maxi. IBM believes that its clients will never move 100% of workloads to public clouds, so it built/acquired platforms that let clients run AI from anywhere. The company’s long-term vision is to convert every software and consulting engagement into a recurring ARR machine. IBM’s north star is simple: grow, expand margins, and convert growth into double-digit FCF.
Several catalysts can propel IBM in the coming year, including the z17 mainframe launch, AI monetization, software acceleration, and synergies from prior acquisitions. The IBM Z revenue has surged over 60% YoY in Q2 25, one of its strongest quarters in years. ARR is up 10% YoY to $22.7 billion, with Red Hat, Automation, and Data segments compounding double digits. The Hashicorp acquisition gives IBM Terraform and Vault dominance in infrastructure as code and hybrid cloud automation. IBM's operating leverage tool, Client Zero, is reducing costs, and the company is targeting $4.5 billion in productivity gains by 2025. IBM’s 2025 FCF guidance has already been raised to $13.5 billion, enabling it to have the funds for both dividends and M&A.
IBM’s business today runs on three core segments: software, consulting, and infrastructure, with a smaller financing arm to grease the wheels of enterprise adoption. IBM’s software segment did the majority of the company’s business, reflecting $7.4 billion of $17 billion in Q2 25 revenue. Although Transaction Processing remains strong and serves as the backbone for mission-critical workloads in global banking and telecommunications. IBM has an army of over 160,000 consultants that are executing digital transformation and AI projects globally; this segment raked in $5.3 billion in Q2. With a nice backlog of $62 billion, GenAI signings have been surging in recent quarters. With the z16 shipments ramping up, infrastructure revenue jumped 14% YoY, delivering yuge gross margin leverage.
IBM’s operations span the globe, with a majority of revenue coming from the Americas then EMEA, and Asia Pacific. EMEA has become a growth engine, posting mid-single-digit digital growth despite macro turbulence, driven by European banks, telcos, and energy plays that are embracing hybrid cloud and automation. Though America remains IBM's cash cow, with consistent, stable, and margin-rich revenue coming from the U.S. feds and financial sectors. While Japan and India remain strong, China’s regulatory policy is tightening, which is creating an uneven growth profile. IBM is partnering with regional hyperscalers and governments by leveraging its strengths in data sovereignty and hybrid infrastructure. IBM's revenue is rooted in long-term contracts with governments and Fortune 500 clients.
IBM has been making moves in the shadows over the past 18 months, with the launch of z17 and embedding AI inference directly into silicon. This is a game-changer for banks and insurers who now can run AI models on the same platform as their core systems without delay or compliance nightmares. IBM Z revenue is up 67% YoY, and the infrastructure profit margin is almost 70%. On the software side of things, Watsonx has evolved into an enterprise AI ecosystem. IBM's acquisitions of HashiCorp and DataStax strengthened IBM's control over automation and the data stack and cementing its moat as a dev infra layer for hybrid enterprises. IBM has become a silent partner in running transactions, logistics, and compliance frameworks for the real economy. IBM isn’t trying to win a hype war, but is silently building the infrastructure underneath it.
The global technology landscape is changing, and it's changing fast. No longer is it defined by what cloud platform you choose, but how fast it is, and how deeply AI can be integrated without hurting core systems. For years, IBM has been typecast by its past, but they are beginning to change minds as it is one of the few tech players that can build both AI models and the infrastructure they run on. While Amazon, Microsoft, and other hyperscalers focus on building bigger clouds, IBM is focused on infrastructure that actually makes AI useful. IBM’s advantage is its vision and integration, making it a de facto partner for industries where failure isn’t an option.
Expert nerds love throwing trillion-dollar numbers around like they are pieces of pepperoni. But Azar Capital Group and IBM don’t chase TAM numbers; we chase TAP. IBM attacks the problem, and it's where their model starts pulling ahead of the rest of the so-called disruptors, who are stuck in the hype tunnel. The hybrid cloud software market, automation tooling, and enterprise AI solutions represent trillions in potential spend, but that spend is attractive unless vendors can operate within the complex systems and compliance barriers that large firms face. A core problem that IBM solves is fragmentation, as enterprises now operate with several cloud environments that must be stitched together. This is what makes IBM unique, as they aren’t racing to expand to the top of the funnel; they are already embedded at the bottom of the layer, where purchase orders and written and non-negotiable.
The landscape is shifting, with high interest rates, geopolitical instability, demographic shifts, and policy interventions that have turned the tech world on its head. IBM’s value prop is aligned with its shift; they aren’t selling moonshots, they are selling margin. The world's largest economies are now pushing AI-heavy regulations. This plays directly into IBM’s hands, as they operate the governance stack, for example, WatsonX, which was built for compliance first and experimentation second. Automation is no longer optional; it is the only path forward, and enterprises are being forced to encode domain expertise into software before their workforce retires. From supply chains to customer service operations, IBM's consulting arm is already deploying agents to automate processes, creating strong recurring revenue.
AI is here, and most of the industry is about to be overwhelmed. The players that survive won’t be the ones who built the biggest models, but those who figured out how to make them work at scale and at sustainable costs. IBM understands this more than most; it has navigated through the dot-com crash, the cloud pivot, and now it's operating through AI industrialization and building the scaffolding it will stand on. IBM released Granite, a small, domain-specific open foundation model that is fine-tuned and built to run fraud detection, call centers, and compliance checks that can fail. IBM decided to embed AI inference directly into its silicon with Telum II, a direct assault on latency and infrastructure bloat. Bringing in HashiCorp’s products into the fold enables IBM to own the entire infra-as-code lifecycle.
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IBM battles on many fronts against well-funded players. On the cloud and hybrid platforms, IBM duels with Amazon, Microsoft, and Google, but IBM isn’t fighting to control compute; it is selling the connective tissue. This makes IBM a threat because it isn’t a hyperscaler; it's a hyperscaler-neutral orchestrator with real-world scars in regulated industries. On the consulting side of things, they face the Accenture, Deloitte, and Capgemini nerds that dominate scale and body count. On the software side, IBM owns Terraform and Vault, which are synonymous with infrastructure-as-code. Watsonx is also making moves in the AI governance space, where no other hyperscaler has credible solutions, in a segment where compliance wins, IBM wins.
IBM’s moat is big, with its most durable advantage being its strategic embedment. IBM has embedded itself within the CIO budget by installing itself deeply into mission-critical pressure points, and leaving IBM would take several years. Despite being seen as dusty in certain circles, IBM is still the favorite in sectors where trust matters. This enables IBM to close AI and cloud deals where new incumbents get stuck. IBM sits on one of the deepest patent portfolios in tech, and they are operationalizing it. Also, while hyperscalers are hemorrhaging cash on training and infrastructure, IBM runs lean, cost-optimized models, with Groq signing a partnership with IBM recently to ensure low-cost models. IBM is not trying to out-flash its competitors, but they are winning on efficiency on that scale.
IBM’s barriers and switching costs are not traditional but are built on time, trust, and institutional inertia. When a central bank runs its systems on IBM Z, it won't make the switch to Oracle because of a press release. When a global company signs a deal with IBM, it's not a one-year trial but a 10-year marriage. Switching costs aren’t financial but operational, political, and reputational. This enables IBM to sign deals and sit back, not having to defend every engagement; they just have to outlast everyone else's experiment. Once a workload is running on OpenShift, it's embedded in a support contract, a services engagement, and an ops pipeline. IBM sells into sectors where a failed implementation could have major impacts to real people. None of their major clients are switching to a startup product, no matter how do their AI demo looks.
IBM is the tortoise; in their most recent earnings report, the company made $17 billion in revenue, up 8% YoY. With a majority of this revenue stemming from software and infrastructure. The company’s gross margins improved to 56%, showing that IBM is selling more high-margin products. Operating profit was $3.4 billion, and IBM earned about $2 billion in net income. IBM has a strong balance sheet with $15.5 billion in cash as of its most recent quarterly report (Q2 2025). This comes with a cool $64.2 billion in debt, but only about $11 billion is related to its financing business. IBM’s long-term liabilities are stable and under control.
IBM has the skills to turn revenue into real cash. In the second quarter of 2025, IBM reported $3.2 billion in operating cash flow and $2.7 billion in free cash flow. IBM also expects to generate more than $13.5 billion in FCF, which is more than enough to cover dividends, R&D, and manage its debt. IBM trades around 15x forward earnings and about 9.5x EV/EBITDA, which is lower than its peer group. This suggests that IBM may be undervalued. IBM is steady; they have been paying a dividend since 1916, which makes it one of the most dividend-paying players in the game.
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IBM’s organic growth is driven by strong demand for AI-enabled software, hybrid infrastructure, and global interest in regulated digital transformation. IBM is selling real tools that help real businesses modernize safely and efficiently. On the product side, IBM’s watsonx is an enterprise AI platform. It's a full-stack system that enables customers to build, train, deploy, and govern AI across secure environments. IBM's z17 mainframe launch has been extremely successful, with it being a major revenue and margin driver for the company. The z17 helps banks and telcos run AI workloads, reducing latency, boosting performance, and opening up new use cases that competition can’t match. IBM has been expanding into foreign markets, such as EMEA and Asia, where demand for hybrid cloud solutions is skyrocketing. IBM’s trusted products and security-first infrastructure give it an edge over the competition.
IBM has a long history of acquiring firms, not only to scale but to build its product portfolio. Over the past few years, IBM has strung together many smart, targeted deals that fit directly into its long-term vision. IBM acquired HashiCorp, the markets of Terraform, Vault, and Consul, which are key dev tools used to manage cloud infrastructure. They also acquired StreamSets and Databand dot ai to deepen their data monitoring capabilities. IBM is using M&A to create cross-selling opportunities, strengthen its infrastructure, and achieve platform lock-in. We expect IBM to do more deals in the AI tooling and automation space, where IBM can add enterprise credibility and go-to-market strength.
IBM sits in front of several long-term structural winds that aren’t going away any time soon. With the biggest push being toward trusted AI governance. Companies are hitting a wall with AI due to compliance risks and integrating generative AI tools into their workloads. IBM’s WatsonX platform has been designed for enterprise governance, positioning it well to convert demand into real revenue. Regulations are also in IBM’s favor from the EU Poors to the great United States, this makes IBM’s mid of secure hardware a go-to option for financial services, healthcare, defense, and critical infrastructure. Margin expansion is another growth driver for IBM as it leverages its operating efficiency through its internal Client Zero initiative. This uses their own AI tools to reduce delivery costs and SG&A.
IBM doesn’t need to build factories; its growth capacity lies in its R&D, software infrastructure, and consulting scale. IBM has been investing heavily in AI, chip design and is focused on smaller, more efficient models that can run well in enterprise settings. IBM is also leading the charge on open AI tooling with InstructLab, which makes it easy for clients to customize models for their own use. IBM is also increasing its consulting footprint in key regions. Combining global delivery centers with regional experts gives them the ability to expand capacity without inflating costs. IBM is also scaling its capacity by improving overall infrastructure efficiency, with the z17 and Power11 platforms.
IBM’s supply chain isn’t as visible as a company shipping physical goods, but it still must manage a complex pipeline of chips, software updates, consulting engagements, and cloud services across 170 countries. IBM has a major edge due to its vertical integration; it designs its own ships, controls its software stacks, and deploys everything through its own consultants. This reduces reliance on third parties and lowers the chance of issues, which is a big deal for governments, banks, health care organizations, and telcos who can’t afford downtime. Unlike competitors who rely on multiple partners and cloud providers, IBM’s tight control enables it to deliver fast. During the COVID-19 era supply chain disruptions, IBM kept hardware deliveries stable and continued to onboard clients without delay.
IBM is built like a cathedral and engineered for performance, but this also means its margin for error is low. While IBM’s supply chain is strong, if they got hit with a chip shortage or geopolitical tensions could impact sourcing out of East Asia. Also, one botched rollout or a large integration hiccup could damage client confidence, which would enable competitors to pounce. IBM’s management team also faces risks itself, while Arvind has executed in the past, if he leaves or the board loses confidence, IBM could risk falling back into bureaucratic instincts. The company has done an excellent job in the years prior at shedding dead weight, but if its discipline slips, it won't take them long to fall back into its bad habits.
If the decels are correct, the z17 cycle is peaking, Red Hat growth will fall, and consulting plateaus. While this is far-fetched, it's plausible that AI growth stalls out. Another threat is overpromising productivity gains. IBM has made cost-cutting and automation a part of its story; if these gains don’t show up or hurt client timelines or satisfaction, IBM could find itself grinding for growth it doesn’t want. IBM also operates in sensitive segments; a single slip, data breach, or similar incident could cause significant damage. Unlike consumer tech, IBM can’t apologize and move on; its clients demand trust and once the trust is broken, it doesn’t heal with a press release. Another sleepcell issue could be headcount reduction. While disruption may be beneficial for margins, it could harm morale, or they may face backlash from European regulators, whose labor laws are stringent.
Pricing power is also a concern, with Microsoft, Amazon, and Google slashing cloud pricing to win workloads. IBM will either have to lower prices or increase performance. Startups are offering tools at a fraction of the price of IBM, but are burning money and are unprofitable. If the AI hype cycle matures faster than expected, clients may retreat to “wait and see” mode, especially for multi-year consulting projects. Right now, some may consider IBM cheap, but that only matters if you believe in the margin expansion and future growth projections. IBM’s FCF is strong, but also highly sensitive to operating leverage. If consulting costs slow down or if internal automation fails to deliver savings, FCF could come short of the firm's $13.5B target.
IBM stands at a unique intersection; IBM is growing, improving margins, expanding free cash flow, and yet is still being priced like a legacy industrial play. In a bull case, IBM leverages its current momentum to achieve dominance, with the z17 continuing to drive infrastructure growth through 2026. In this case, Watsonx not only retains its huge book of business but it also begins to convert projects into real, high-margin ARR. In a base case, infrastructure growth slows, while software growth remains in the single digits, with Red Hat and Automation offsetting weaker processing. In this scenario, consulting projects plateau, and internal cost savings lift margins. But in a bear case, IBM sees no growth, WatsonX fails to produce strong revenue, and free cash flow tips below $12, causing margin expansion to stall.
There are several catalysts in the near term (six to twelve months) that we will be paying attention to. First and most important is turning bookings and logged revenue into real cash. The company has signed almost $8 billion in GenAI business, but it has yet to show up on the income statement. Next up is the continued momentum of the z17 cycle. If IBM protects its high-margin software business, it will continue to create software and services revenue. Next up is the HashiCorp integration, as people want to see Terraform, Vault, and Consul become part of the Red Hat and Ansible ecosystem. This would generate cross-selling opportunities and simplify hybrid deployments. If this works, IBM will have one of the strongest infrastructure as code products in the game. IBM is likely to see massive productivity savings from internal automation.
The long-term upside for IBM is real, but there are real risks. If IBM fails to convert its GenAI pipeline into high-margin revenue, the company could fall behind its targets. If IBM wins positioning, its software ARR will become unshakable, its hardware cycles will become even stronger, and its consulting revenue will continue to grow. Right now, IBM is doing many things at a high level, but they have yet to break out of its old identity. The bad boys over at Azar Capital Group are fans of IBM, and believe they will turn AI bookings into long-term term sticky, high-margin revenue. If the management team continues to execute, IBM will continue to grow.
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Disclosure
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