International Business Machines (IBM) CEO Arvind Krishna has spent the past 10 days apologizing.
On July 14, he told shareholders his company had faltered. Eight days later, he opened the second-quarter earnings call by admitting that IBM fell short on execution.
Krishna then told CNBC on Thursday, July 23, that only 2% of IBM’s software could be replaced by applications built by artificial intelligence models.
Everything else, he argued, helps clients get ready for AI rather than compete against it.
That is a bold number from a chief executive whose stock recently recorded the worst single trading day in its 115-year history.
IBM shares rose 4.01% to $214.94 by midday Friday, July 24, up $8.30 from Thursday’s close of $206.65, but the stock is still down more than 18% over the past month and sits near its 52-week low of $199.19.
What Krishna’s 2% claim means for IBM software revenue
Software is IBM’s profit engine.
It brought in $7.76 billion in the second quarter, up 5%, and makes up roughly 45% of the company’s revenue, CNBC reported.
Krishna’s argument rests on a distinction most investors skip.
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Most of that revenue is infrastructure software, the layer that manages data, security, and hybrid cloud plumbing. AI tools need that layer to run.
Applications are the exposed category.
IBM’s Tririga lease management product, acquired in 2011, earns about $2 million a year from Starbucks (SBUX), which is phasing it out before a 2027 support cutoff.
Put a dollar figure on it. Two percent of a $7.76 billion quarterly software business is about $155 million a quarter, or roughly$620 million a year.
Krishna made the same case to analysts on the earnings call, telling them IBM’s AI strategy is the right one and the shortfall came down to execution, Yahoo Finance reported.
The 42% mainframe collapse behind IBM’s AI defense
IBM’s Z mainframe revenue fell 42% in the second quarter, and the transaction processing software tied to those machines dropped 9%, according to CNBC.
One quarter earlier, Z revenue had grown 48%.
The reversal came from IBM’s own customers. Krishna wrote in IBM‘s July 14 letter to investors that clients spent late June redirecting capital toward servers, storage, and memory to lock in supply ahead of price increases.
Memory prices are climbing because AI chip production absorbed manufacturing capacity. So IBM’s clients bought hardware first and pushed software purchases into the next quarter.
That sequence hurts twice, because IBM collects about $3 of software revenue for every dollar of mainframe hardware it sells.
Inside IBM’s second-quarter 2026 results
- Revenue: $17.2 billion, up 1% year over year, according to IBM‘s earnings release
- Software: $7.76 billion, up 5%, with Red Hat up 11% and data offerings up 19%
- Consulting: $5.33 billion, flat
- Infrastructure: $3.84 billion, down 7%, including the 42% drop in IBM Z
- Operating earnings: $2.93 a share, up 5%
- Free cash flow: $4.8 billion for the first six months, flat year over year
Why Wall Street cut IBM stock price targets anyway
Krishna handed analysts a second data point.
About one-third of the deals that slipped out of the second quarter have already closed in July.
IBM normally recaptures two-thirds to three-quarters of slipped deals within six months, Benzinga noted. Krishna called that a deferral rather than destroyed demand.
Related: Oppenheimer sends warning on IBM after shares crash
Wall Street trimmed targets regardless. Morgan Stanley analyst Erik Woodring cut his target to $190 from $293 on July 23 while holding an equal weight rating, according to GuruFocus.
Stifel analyst David Grossman moved to $235 from $290 and kept a buy rating, Investing.com reported.
Grossman told clients IBM’s stock will likely stay stuck in a narrow range, with more room to fall than to rise.
Guidance came down with them. IBM now expects full-year constant currency revenue growth of 4% to 5%, trimmed from more than 5%.
Oppenheimer had already downgraded the stock after the July 14 warning.
How IBM stock compares with the S&P 500 and software peers
The scoreboard is unforgiving.
- IBM: Down about 30% in 2026 through Wednesday’s close, according to CNBC
- S&P 500: Up about 10% across the same stretch
- iShares Expanded Tech-Software Sector ETF: Down 17%
IBM is trailing its own sector by 13 percentage points, which points to execution problems specific to Armonk on top of the industry-wide anxiety about AI.
IBM now trades at 19.08 times earnings against a 52-week high of $332.46, and yields 3.15% on a quarterly payout of $1.69 a share. Its free cash flow held at $4.8 billion for the first half.
IBM has paid consecutive quarterly dividends every year since 1916. That streak is the biggest reason income investors held on through a 25% one-day crash.
What has to happen before IBM stock earns back its valuation
Krishna and CFO Jim Kavanaugh are asking investors to accept a two-part promise: The delayed deals come back, and mainframe demand recovers.
Kavanaugh told Yahoo Finance that IBM sees no evidence of clients walking away from the mainframe, and that installed capacity points to a record year against prior programs.
Four things have to land for that promise to hold:
- The remaining two-thirds of slipped deals close by the fourth quarter
- Software growth reaches the 6% to 8% full-year range management now guides to
- Free cash flow rises by about $1 billion for the year, as reaffirmed on July 22
- Z mainframe revenue stops declining by early 2027
IBM is also committing more than $10 billion to quantum computing over five years, which will not offset a 42% mainframe decline inside 2026.
What IBM’s next two quarters mean for ordinary investors
Krishna’s 2% claim is testable, which is what makes it useful.
Red Hat grew 11% in the quarter, while transaction processing software fell 9%. Transaction processing is tied directly to the mainframe cycle, so that split supports his timing argument.
Here’s the practical read. At $214.94, IBM’s stock price already assumes 4% to 5% revenue growth and stable cash flow. It assumes nothing more.
If software growth jumps back into double digits, that upside isn’t priced in yet.
Buying now means trusting that the delayed deals land on schedule. Waiting costs you the first leg of any rebound and buys you one more quarter of evidence.
The number to watch on the October earnings call is Z mainframe revenue. Krishna has said software should catch back up within a year, and the mainframe line is where that claim will show up first.
