IBM (IBM, Financial) delivered Q1 2025 earnings that beat Wall Street expectations and kept its full-year outlook intact, but a weaker-than-expected Software segment has investors concerned.

Shares dropped 7% in early Thursday trading despite overall solid results. Analysts say the shortfall in Software revenue was the key reason for the stock's negative reaction.

Morgan Stanley analysts, led by Erik Woodring, noted that expectations were high for Software to carry the quarter. Instead, modest beats in Consulting and Infrastructure weren't enough to offset the Software miss—the first underperformance in several quarters. They pointed out that future growth in the segment now faces tougher comparisons and economic headwinds.

Morgan Stanley held its Equal-weight rating and trimmed the price target to $233 from $237. The firm said IBM will need near-perfect execution moving forward to avoid further valuation pressure, especially in Software.

Wedbush took a more optimistic stance, maintaining its Outperform rating and $300 price target. Analysts there said IBM's reaffirmed 2025 revenue and free cash flow outlooks show confidence, despite a tough macro environment.

IBM's competitors fared better Thursday morning. Oracle (ORCL, Financial) and Dell (DELL, Financial) were both up 3%, SAP (SAP, Financial) edged 0.5% higher, and Microsoft (MSFT, Financial) gained 1.8%.