IBM’s Post‑Earnings Slide is Overdone. The Quantum AI Story is Mispriced and Misunderstood

Shares of International Business Machines (NYSE:IBM | IBM Price Prediction) are being left out of the latest AI party, thanks in part to a quarterly beat that failed to impress. Undoubtedly, there’s quite a bit of legacy drag when it comes to one of the original tech plays. And while AI may very well act as more of a double-edged sword (think Anthropic’s impact on businesses like COBOL, which is old news at this point), I do think that the net effect of any sort of legacy software drag and pull from new innovations like AI and quantum will be positive for the firm, especially over the long run. 

Of course, for now, it’s sell first and ask questions later when it comes to the software names, including the ones that have taken steps to become more AI-native. While some software plays are sure to be left behind as agentic AI takes off, I continue to view International Business Machines as more of a misunderstood innovator that might be let out of the penalty box sooner rather than later as the breakthroughs from its research finally start to flow in. 

Software is in a tough spot, but International Business Machines is a different kind of innovator

With a rather unsurprising in-line guide, worries about AI’s potential to cannibalize parts of the business, and concerns about the potential for growth to stall out, I get why investors would want to move on to hotter things, especially as the semiconductor trade heats up again.

Despite the haze of uncertainty and the many question marks surrounding the software side, I do think that the quantum question marks and applications of agentic AI make the name worth sticking with, even if the name is due to run into a tougher period as the rest of the market rallies higher.

The company has spent a lot of time and money on research on the frontier, especially in quantum. Such efforts probably won’t be immediately monetizable enough to cause the kinds of vicious melt-ups we’ve witnessed across the semi scene of late. But I do think that the little “wins” from the nascent technologies are worth acknowledging. At the end of the day, the quantum efforts aren’t for nothing, especially if investors really are discounting its potential as they did to AI before ChatGPT touched down a few years ago.

We can’t ignore the quantum and AI innovations underneath the hood

As we move from intriguing-but-not-needle-moving applications like simulating magnetic materials to something game-changing like AI- and quantum-assisted biotech (drug discovery), I do think there is the potential for upside surprises along the way as the firm becomes more about future innovations and a bit less about the legacy side.

Of course, it can be quite hard to value a company that’s shown glimmers of futuristic innovation with the weight of legacy.

With the company also teaming up with red-hot Arm Holdings (NASDAQ:ARM), a move I cited in a prior piece as a win for both firms, for work on a dual-architecture chip for enterprise AI workloads earlier this month, I also think there’s more room for the types of collaborative deals we’ve seen across some of the major AI heavyweights. Indeed, all these partnerships are win-win deals, in my view, and they could have more of an uplifting effect, as they shed light on the opportunity to make bigger splashes in AI and even quantum.

While quantum is still early days, perhaps too early, I think the stock is getting obscenely cheap after its post-earnings plunge. At 18.6 times forward price-to-earnings (P/E), you’re getting a software firm with staying power, AI ambition, and a quantum business that investors don’t seem to really care for (as much) these days.