IBM Faces Key Pivot After Earnings
A new price target range has emerged but hold off until we see if the legacy tech name can make a run.
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After the closing bell on Wednesday afternoon, IBM (IBM) released the firm's fourth quarter financial results. For the period ended December 31, 2025, IBM posted an adjusted EPS of $4.52 (GAAP EPS: $5.86) on revenue of $19.686 billion. These top- and adjusted bottom-line numbers both beat Wall Street's expectations quite handily, while that revenue print was good enough for year-over-year growth of 12.2%. The adjustments made were primarily made for the impacts of tax reform as well as for acquisition related purposes.
Operations
As revenue grew more than 12% to $19.686 billion, gross profit grew 14% to $11.9 billion and gross margin increased from 59.5% to 60.6%. Adjusted gross margin improved from 60.6% to 61.8%. Pre-tax income margin increased from 18.8% to 21%. On an adjusted basis, this margin improved slightly from 23.9% to 24.1%. Finally, GAAP net income printed at $5.6 billion or $5.86 per fully diluted share, up from just $3.15 for the year-ago comparison. Once adjusted, that EPS number becomes $4.52, which is still up from $3.92 for Q4 2024.
Segment Performance
- Software generated revenue of $9.031 billion (+14%), producing a segment gross margin of 83.4%, down from 85%
- Consulting generated revenue of $5.349 billion (+3.4%), producing a segment gross margin of 28.4%, up from 28%
- Infrastructure generated revenue of $5.132 billion (+20.6%), producing a segment gross margin of 60.6%, up from 56.9%
- Financing generated revenue of $179 million (+5.3%), producing a segment gross margin of 44.1%, down from 46.9%.
Guidance
For the full year just started, the firm is projecting revenue growth of more than 5%. Wall Street was looking for growth of about 5%, so this is not exceptional guidance. IBM also sees free cash flow growth for the year of about $1 billion. That is impressive.
Fundamentals
For the period reported, IBM generated operating cash flow of $8.104 billion. Out of that number came capex spending of just $550 million. This left free cash flow of $7.553 billion, up 22.6% from the year-ago comparison. Out of that free cash number, the firm paid out cash dividends of $1.573 billion.
Turning to the balance sheet, IBM ended the quarter and year with a cash position of $14.471 billion and inventories of $1.22 billion. This puts current assets at $36.944 billion. Current liabilities add up to $38.658 billion. That includes shorter-term debt of $6.424 billion but also deferred income of $16.101 billion. As we know, deferred income is not a true financial obligation. At the headline, the firm's current ratio stands at 0.96. Once adjusted for that deferred income, this ratio rises to a much more aesthetically pleasing 1.64.
Total assets amount to $151.88 billion. Of that number, $79.108 billion is labeled as either "goodwill" or other intangibles. At more than 52% of total assets, I am uncomfortable with that number. Total liabilities less equity comes to $119.139 billion. Within that number is $54.836 billion in long-term debt. IBM can handle a large debt load, especially with the cash flows that we just discussed, but that is a lot of debt and that number is up 10% in twelve months. I do not like that.
The Chart
Readers will see that IBM broke out of a cup-with-handle pattern in late October, but that breakout more or less fizzled out. The current basing period of consolidation has been in effect ever since and that pivot of $320 acted as resistance on Thursday. Based on that pivot, one could probably put a target price of $365 to $370 on the stock. That said, I would wait to see if the shares make another run at that pivot before acting on any impulse given the current software environment.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
