International Business Machines' (IBM) second half recovery scenario is plausible, supported by early deal recapture and improved productivity, but the guidance leaves little margin for error and requires a sharp recovery in its Z business, Morgan Stanley said in a note Thursday.

IBM's bull case suggests it has already recouped one-third of the push deals from Q2, subscription-based spending remains strong, recent acquisitions are gaining traction, Consulting is gradually recovering, and mainframe will remain central to its customer base, driving the software flywheel in H2, according to the note.

The brokerage estimates the H2 "base case" guidance assumes a meaningful recovery in Software and z17, requiring sequential revenue dollar growth stronger than the last 3 years, even as management acknowledges that the capital expenditure deferral environment and below-normal pipeline yields are expected to persist, the note added.

Management said the Q2 deal shortfall was transitory and the Q3 print and Q4 guidance should help clarify the debate, the brokerage said.

Morgan Stanley kept an equal weight rating on IBM and lowered its price target to $190 from $293.

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