By Mackenzie Tatananni

IBM resisted a broad tech selloff Tuesday after a Wall Street upgrade underscored analysts' growing conviction that Big Blue's decade-long software makeover was finally paying off.

J.P. Morgan analyst Brian Essex moved off the sidelines on Tuesday as he upgraded shares to Overweight from Neutral with a $291 price target, up from $270. IBM stock climbed 4.4% to $263.20 on Tuesday.

"We've previously noted that software is the primary driver of IBM stock and this remains the case as the higher value software business mix continues to grow," Essex wrote.

This isn't the first time investors have seen this argument. Barclays analyst Raimo Lenschow initiated coverage on the stock at Buy earlier this month, citing IBM's concentration in software.

Essex has conviction that IBM's software business will pick up speed in the second half of 2026. The company "has spent the better part of a decade repositioning itself from a hardware and services business into a software-led platform anchored by hybrid cloud and AI," he wrote. Essex noted that software is the primary driver of the stock, comprising roughly 45% of IBM's revenue but nearly two-thirds of consolidated profit.

The analyst predicted that software will become more central to IBM as AI adoption increases. Software brings in predictable, high-margin subscription revenue and better cash flow, contributing to a better financial profile than what its traditional hardware and consulting segments have to offer.

Moreover, IBM's software business drives demand for its consulting services and mainframes, creating a powerful growth cycle that Wall Street is overlooking, Essex contended.

He acknowledged criticism over IBM's heavy spending for growth. The company has made about 50 acquisitions in the last five years, headlined by its high-profile purchase of Confluent in March.

"However, we believe that investing in high-growth software now will actually reduce that need later," Essex wrote. "Over time, it will shift IBM toward recurring subscription revenue, permanently improving the company's financial health."

In his view, room for multiple expansion exists if IBM can "gain incremental traction as a substantial AI infrastructure beneficiary," or, alternatively, if it announces "a favorable revision" to its timeline for delivering a fault tolerant quantum computer."

While much of the upgrade hinges on software, IBM's quantum computing effort is an integral part of its business and future growth.

Both the upgrade and two new executive orders targeting quantum appeared to be lifting the stock. President Donald Trump signed two directives on Monday mandating the creation of a research-grade quantum computer by 2028 and accelerating the government's shift to post-quantum cryptography by 2031.

IBM CEO Arvind Krishna attended Monday's signing event at the Oval Office. Significant federal backing has lent strong credibility to IBM's quantum program, helping to fuel the stock's recent gains.

In May, the Commerce Department and IBM each pledged $1 billion to build Anderon, a standalone quantum foundry. Days later, IBM doubled down on its commitment, announcing a $10 billion investment in quantum research and manufacturing over the next five years.

The timeline Essex refers to here is IBM's goal to deliver its most powerful system to date by 2029, where "fault-tolerant" describes the system's ability to operate normally even in the presence of errors.

While IBM has one of the industry's most ambitious timelines, the race is heating up following the government's new 2028 target. Though exact timing is still uncertain, "we think IBM is well positioned as a quantum leader" for its share of a meaningful total addressable market, Essex wrote.

In his view, this market-leading position warrants "some premium for valuation." He noted that IBM has already secured over $1.1 billion in quantum customer contracts since 2017 and surpassed $1 billion in cumulative quantum revenue. Any pull-forward to its deployment for its biggest quantum system, Starling, "could result in upside in this case," Essex wrote.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com

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June 23, 2026 10:12 ET (14:12 GMT)

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