IBM shares took a dive on Thursday despite stronger-than-expected third-quarter earnings and revenue. Investors have turned their focus to signs of cooling growth in the company’s software and hybrid cloud businesses. The results showcase the increasingly high bar for legacy tech firms navigating the shift toward artificial intelligence and digital transformation.
The tech giant reported adjusted earnings of $2.65 per share, a 15% increase from the same period a year earlier, beating consensus estimates of $2.44. Revenue climbed 9% to $16.3 billion, surpassing forecasts and marking IBM’s fastest quarterly growth rate in more than two years. The company also raised its full-year revenue and free cash flow guidance, citing robust demand for AI-driven products and infrastructure services. Despite this, the stock traded more than 1% lower by mid-afternoon, after earlier plunging as much as 8%, as investors dug into the details and found a few red flags beneath the headline numbers.
Solid Quarter Overshadowed by Cloud Concerns
IBM’s strong overall performance was moderated by slower growth in its Hybrid Cloud and Software units, key drivers of its turnaround strategy. Sales at the Hybrid Cloud business rose 12% year over year in constant currency, a slowdown from 14% in the prior quarter, while transaction processing revenue fell for the second consecutive period, dropping 3%.
Analysts called it “an overall clean quarter” but acknowledged the market’s reaction reflected heightened expectations. “IBM is mixing up to higher-margin software and driving strong free cash flow,” the analysts wrote, maintaining their Buy rating and noting that the company remains well-positioned for sustained estimate revisions upward.
Still, the deceleration in cloud growth stands out at a time when investors are rewarding tech companies that show acceleration in AI adoption and enterprise cloud spending. Competitors like Microsoft and Oracle have recently posted sharper gains in cloud revenue, raising questions about whether IBM’s growth trajectory is peaking.
High Expectations Across the Tech Sector
The market’s tepid response to IBM’s “beat-and-raise” quarter underscores the pressure facing big tech ahead of a pivotal earnings stretch. Next week, five of the so-called “Magnificent Seven” — including Apple, Microsoft, and Alphabet — are set to report results, representing a combined market capitalization of roughly $15 trillion.
With valuations running hot across the sector, even modest slowdowns in growth could trigger outsized reactions. “Investors are looking for perfection this quarter,” said one portfolio manager quoted by Reuters. “When a company like IBM shows any sign of cooling, even if the numbers are strong, the market punishes it.” Despite IBM’s stumble, other tech heavyweights traded in the green on Thursday, suggesting the selloff was more company-specific than indicative of broader weakness.
AI and Software Strength Offer Bright Spots
IBM’s AI and consulting segments remained bright spots, with management highlighting strong demand for watsonx, the company’s generative AI platform launched last year. CEO Arvind Krishna said adoption is accelerating among enterprise clients seeking to integrate AI into customer service, data analytics, and cybersecurity.
The company also noted growth in its infrastructure division, supported by steady mainframe demand and new hardware refresh cycles. Free cash flow for the quarter came in at $2.1 billion, and IBM reiterated its forecast of over $12 billion in free cash flow for the full year. While the numbers point to operational strength, analysts at Bloomberg Intelligence noted that “IBM’s margin improvement story is intact, but top-line acceleration remains elusive.” The company’s shift toward software and cloud continues to drive profitability, yet its growth lags faster-moving peers in the AI and hyperscale computing arenas.
Looking Ahead
Investors will now be watching whether IBM’s cloud slowdown proves temporary or marks a longer-term plateau. The company’s ability to sustain double-digit growth in software and AI services will likely determine whether it can regain market confidence in the coming quarters.
With the next wave of major tech earnings around the corner, IBM’s muted reaction serves as a cautionary signal: in an era of elevated valuations and AI-fueled optimism, even solid execution may not be enough to satisfy Wall Street’s appetite for speed.
