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International Business Machines (IBM) has once again delivered a strong quarterly performance, with both revenue and earnings exceeding Wall Street expectations. Yet, despite the solid numbers, the stock has faced downward pressure, echoing the market reaction seen in the previous quarter.
The market’s tepid response to IBM’s better-than-expected quarterly performance can be attributed to broader macroeconomic factors that are weighing on the company. Corporate clients are becoming more cautious with their spending, taking longer to make decisions, and pulling back on non-essential projects. IBM’s consulting arm, which tends to be more sensitive to shifts in government policy and U.S. federal spending, has also seen some softness due to these budgetary constraints.
At the same time, IBM’s valuation is raising concerns. The stock has surged more than 53% (based on its closing price on July 23) over the past year and is now trading at a forward price-earnings ratio of 26x, which is relatively high for a company with projected mid-single-digit earnings growth in 2025 and 2026. This raises questions about how much more upside is left, particularly when growth expectations remain modest.
Still, IBM’s long-term prospects are far from bleak. Its software segment continues to show resilience and growth potential, led by hybrid cloud, infrastructure, and artificial intelligence (AI). These areas could be key to unlocking future value, even as the company navigates short-term economic headwinds.
What’s Ahead for IBM?
Despite short-term headwinds, IBM is poised to deliver steady growth, led by its strategic shift toward software and the accelerating adoption of artificial intelligence (AI).
AI is emerging as a key growth catalyst for IBM. The technology giant is embedding AI across its workflows and using its software to modernize enterprise operations. With a full-stack AI offering and deep consulting expertise, IBM is positioning itself as a comprehensive AI partner. This strategy is paying off. The company’s generative AI bookings have reached $7.5 billion since inception, and demand continues to accelerate. IBM’s portfolio includes AI agents and assistants, as well as a growing consulting practice to help clients deploy AI at scale.
Software has become a significant engine of growth for IBM. In Q2, software revenue rose 8%, bolstered by a solid base of annual recurring revenue (ARR), which climbed to $22.7 billion, up 10% from the prior year. Red Hat, IBM’s hybrid cloud business, posted strong growth with double-digit bookings and market share gains. OpenShift revenue surged over 20%, with ARR hitting $1.7 billion. The automation segment also gained traction, growing 14% and benefiting from IBM’s acquisition of HashiCorp, which is already contributing to an uptick in bookings.
The company’s AI-driven data software saw 7% growth, while transaction processing dipped slightly. Nonetheless, software now accounts for approximately 45% of IBM’s overall business. With consistent investments in innovation and strategic acquisitions, the company expects near double-digit software growth for the full year.
Infrastructure remains a key part of IBM’s value proposition, growing 11% this quarter. The standout was Hybrid Infrastructure, which jumped 19%, led by IBM Z, the company’s mainframe platform, which rose 67%. Clients are increasingly turning to IBM Z to power AI workloads, validating IBM’s long-standing investment in this critical technology. The new z17 system, in particular, has gained early traction, which is positive.
IBM’s Consulting segment held steady this quarter, as revenue stabilized amid a challenging macro environment. Backlog remains healthy, up 4% year-over-year, and there’s growing client demand in areas like AI operations. The GenAI consulting pipeline reached over $1 billion in the latest quarter. While some discretionary projects have seen delays, IBM is seeing better traction with new clients and a growing number of AI engagements tied to larger, strategic initiatives.
In short, a rapidly expanding software footprint and AI-driven momentum position it well to deliver steady growth. However, macroeconomic uncertainty and cautious customer spending could continue to be a drag in the near term.
Is IBM Stock a Buy, Sell, or Hold?
Wall Street is cautiously optimistic about IBM’s prospects and maintains a “Moderate Buy” consensus rating on IBM stock.
While its recent quarterly results exceeded expectations, the post-earnings selloff reflects investor concerns over macroeconomic pressures and a valuation that may already price in much of the near-term upside. That said, IBM’s transformation toward a hybrid cloud and AI-driven business model is gaining momentum. Moreover, growth in recurring revenue, strategic acquisitions, and increasing demand for AI-enabled solutions augur well for growth. With nearly half its revenue now coming from software and a robust AI pipeline, IBM is well-positioned for long-term growth.
However, with corporate IT budgets under pressure and IBM’s valuation sitting at elevated levels, upside may be somewhat constrained in the short term. For investors with a long-term view, a dip in the stock could present a compelling entry point.
