IBM's (IBM) Software business underperformed in Q1, so the company's execution for the rest of the year needs to be "flawless" to maintain the stock's premium valuation, Morgan Stanley said in a Thursday note.

Meanwhile, stronger free cash flow generation, although a bit dependent on a weak US dollar, could offset the underperformance, Morgan Stanley analysts said. At the current spot rates, they said they expect free cash flow to outperform the company's guidance.

The company said it observed no change in buying behavior in Q1 and the first three weeks of Q2, but if the macro environment worsens, there may be "greater variability" in the Consulting business, consumption-based services in RedHat and parts of its Distributed Infrastructure business, the analysts noted.

Morgan Stanley maintained the stock's rating at equal-weight and revised the price target to $233 from $237.

Price: 230.92, Change: -14.56, Percent Change: -5.93