TLDR
- IBM stock fell 6.5% in premarket trading Thursday after Red Hat cloud growth slowed to 14% from 16% last quarter
- The company beat Q3 earnings and raised full-year revenue guidance, but investors focused on cloud software weakness
- Infrastructure business grew 17% to $3.56 billion, helping offset concerns about the software segment
- IBM trades at a forward P/E of 23.85 versus Accenture’s 17.95 after gaining 30% year-to-date
- Analysts point to M&A strategy and HashiCorp integration as potential growth drivers going forward
IBM stock dropped over 6.5% in premarket trading Thursday despite beating third-quarter earnings estimates. The sell-off came after the company reported slowing growth in its Red Hat cloud business.
International Business Machines Corporation, IBM
Red Hat’s hybrid cloud unit posted 14% sales growth in Q3. That’s down from 16% in the prior quarter. The deceleration spooked investors who have been banking on strong cloud and AI growth.
The market reaction shows how much weight Wall Street places on IBM’s software performance. This segment drives a large portion of the company’s earnings and overall valuation.
IBM raised its full-year revenue outlook for fiscal 2025. The company also topped analyst estimates for both sales and profit in the third quarter. But these positives couldn’t overcome concerns about cloud momentum.
Software Concerns Overshadow Strong Infrastructure Results
The infrastructure division delivered solid results in Q3. Revenue in this segment jumped 17% to $3.56 billion. The mainframe business drove much of this growth.
J.P. Morgan analysts noted that software performance matters more than other business units. They pointed to the segment’s outsized contribution to earnings and company value.
IBM faces a tough comparison next year when it laps peak mainframe growth rates. Analysts say the company needs stronger software performance to maintain healthy overall growth.
The stock has climbed about 30% in 2025 as investors bet on cloud and AI opportunities. IBM now trades at a forward price-to-earnings ratio of 23.85. That’s higher than competitor Accenture at 17.95.
Acquisition Strategy May Boost Growth
Some analysts see IBM’s M&A approach as an undervalued growth lever. The company completed a $6.4 billion acquisition of HashiCorp in 2024.
Evercore ISI analysts highlighted IBM’s strong free cash flow and balance sheet. These financial resources give the company room to pursue deals that could accelerate growth.
The HashiCorp integration is progressing well according to analyst reports. Future acquisitions could help if organic software growth remains under pressure.
Investors are clearly concerned about IBM’s ability to compete in the cloud market. Rivals are fighting for market share as demand for AI services continues to grow.
The cloud software slowdown raised questions about whether IBM can capitalize on AI-driven demand. Red Hat’s deceleration signals potential challenges in capturing this opportunity.
Trading and Valuation Details
IBM shares closed at $287.51 on Wednesday before falling to $266.99 in premarket trading Thursday. The decline represents a $21.16 drop from the previous close.
Despite the premarket sell-off, the stock remains up 30% year-to-date. This gain reflects investor optimism about IBM’s cloud and AI initiatives throughout 2025.
The company’s forward P/E ratio of 23.85 suggests investors are paying a premium for expected growth. This valuation multiple exceeds Accenture’s ratio by nearly six points.
IBM’s Q3 results showed the company can still deliver on earnings while raising guidance. Infrastructure strength helped offset the cloud software weakness in the quarter.
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