International Business Machines (IBM) just delivered its first-quarter earnings report for 2025, and the numbers look strong at first glance. The tech and consulting giant’s financial metrics were solid, driven by the ongoing strength in the software business led by hybrid cloud and artificial intelligence (AI). 

Still, despite the upbeat results, shares tumbled more than 6% in pre-market trading on Thursday, April 24. The market’s response reflects macroeconomic uncertainty, cautious corporate spending, and a few policy-related headwinds.

Let’s unpack the story behind IBM’s latest quarter, what’s weighing on the stock, and whether this drop is an opportunity to buy or a warning sign for cautious investors.

IBM Delivered a Strong Quarter 

IBM reported revenue of $14.5 billion for Q1 2025, alongside $3.4 billion in adjusted EBITDA and $1.7 billion in operating pre-tax income. Operating earnings per share came in at $1.60, topping analysts’ forecasts. This performance was driven largely by IBM’s software business, which now accounts for about 45% of total revenue. Even more promising, 80% of that software revenue is recurring, making it a steady, reliable source of income. 

Generative AI continues to be a significant growth engine. IBM’s AI-related bookings have now crossed $6 billion since inception, with more than $1 billion added in Q1. The growing demand for hybrid cloud and AI solutions suggests the company is well-positioned to deliver solid growth.

Software revenue grew 9% year-over-year, with strong performances in automation (up 15%), Red Hat (up 13%), data (up 7%), and transaction processing (up 2%). Red Hat, in particular, remains a significant growth catalyst for IBM. OpenShift had $1.5 billion in annual recurring revenue (ARR) and registered 25% growth in Q1. 

IBM’s software business is evolving. Around six percentage points of the software segment’s growth came organically, powered by generative AI offerings such as AI assistants and the Watsonx platform. ARR across IBM’s software portfolio reached $21.7 billion in Q1, growing 11% compared to the prior year. 

Why IBM Stock Is Under Pressure 

Despite its upbeat Q1 report, IBM shares took a hit. Much of the pressure came from concerns over the company’s consulting business, which has become increasingly vulnerable to macroeconomic headwinds. Revenue in the division was flat for the quarter, and IBM’s management pointed to delayed client decision-making and reductions in discretionary business spending. Consulting is also more sensitive to policy-related initiatives like those under the Department of Government Efficiency (DOGE), adding another layer of unpredictability.

Management also acknowledged that clients with greater exposure to tariffs and global policy shifts could face more pronounced slowdowns. Since consulting tends to be project-based and heavily reliant on client confidence and capital expenditure, it’s often the first segment to feel the effects of economic tightening.

However, there are signs of resilience even here. IBM saw sequential improvement in its consulting business, with backlog growth in the mid-single digits. High-value service areas like cloud platform engineering and application modernization continued to attract interest, suggesting that not all consulting demand is drying up.

Outlook: Cautious Optimism or Growing Risk?

While IBM’s pivot toward software and strength in hybrid cloud and AI continues to drive meaningful growth, the company remains partially exposed to cyclical downturns, particularly in its consulting and infrastructure-related services. The shift in revenue mix toward more recurring, software-based income is a long-term positive, but it won’t completely insulate IBM from economic uncertainty in 2025.

That said, IBM’s investments in generative AI, hybrid cloud, and Red Hat give it strong tailwinds, and its software-led strategy is delivering results. 

However, IBM stock has risen about 25% over the past 12 months, making aggressive upside more difficult to justify without stronger momentum in all segments.

Analysts have a “Moderate Buy” consensus rating on IBM, with an average price target of $252.28. From current levels, that implies limited upside. 

The Bottom Line

IBM’s Q1 earnings report shows that the company is executing well in areas it controls — software, hybrid cloud, and AI. However, weakness in consulting is a hurdle. 

With a shift in business mix towards recurring revenue streams and a robust AI pipeline, IBM is arguably better positioned than it’s been in years. Thus, long-term investors could consider buying the post-earnings dip in IBM stock.