IBM's Strong Q3 Infrastructure Growth, Cost Savings Offset Weak Gross Margins, Morgan Stanley Says

11:00 AM EDT, 10/22/2026 (MT Newswires) -- IBM (IBM) rebounded in Q3, closing two-thirds of the deals that slipped in the previous quarter, while strong Distributed Infrastructure growth and operating expense savings helped offset gross margin pressure, Morgan Stanley said Thursday in a note. The company reported Q3 adjusted EPS of $2.95 and revenue of $17.10 billion, both modestly above expectations. Q4 guidance for EPS of $4.55 to $4.60 and revenue of $20.3 billion was in-line to slightly below consensus estimates of $4.62 and $20.45 billion, respectively. The brokerage does not expect the bull versus bear debate to change following Q3. Bulls point to growing momentum across several Software sub-segments, a thriving Infrastructure business and cost savings supporting EPS growth. Bears, meanwhile, highlight low-single-digit organic Software growth that needs to improve significantly in 2027 and limited mergers and acquisitions activity, which is crucial to management's 5% revenue growth target in 2027, according to the note. The brokerage raised its 2026 and 2027 EPS estimates to $12.43 and $13.46, respectively, following Q3 earnings. In Q4, Morgan Stanley expects Software and Consulting gross margins to be flat to lower year-over-year, while it models an improving trajectory in Infrastructure margins on potentially higher enterprise license agreements, the note added. Morgan Stanley kept an equal-weight rating on IBM and raised its price target to $240 from $238. Price: 247.46, Change: -4.01, Percent Change: -1.59