The decline came despite IBM raising its full-year revenue outlook, a move that typically signals confidence in future performance. Yet, investors appeared more focused on the deceleration in the company’s cloud and AI-driven software operations, which have become central to its long-term strategy amid intensifying competition from rivals such as Microsoft, Amazon, and Google.
IBM’s software division, which houses its hybrid cloud business Red Hat, reported sales growth of 14%, down from 16% in the previous quarter. The slowdown raised questions about the company’s ability to fully capitalise on the booming demand for AI and cloud infrastructure services.
Analysts at J.P. Morgan noted that IBM’s software performance carries significant influence over investor sentiment.
“IBM’s software performance and outlook tend to carry more weight than the rest of the business due to the level of earnings contribution and value the business represents,” they said, adding that the company will need stronger software growth next year as it approaches the peak of its mainframe upgrade cycle.
So far in 2025, investor bets on IBM’s cloud and AI initiatives have driven the stock up nearly 30% year-to-date. Even after the latest drop, IBM trades at a forward 12-month price-to-earnings ratio of 23.85, notably higher than Accenture’s 17.95, underscoring market confidence in its transformation story.
Beyond the software slowdown, there were bright spots in IBM’s results. The infrastructure segment, which includes its mainframe business, posted a 17% increase in quarterly revenue to $3.56 billion, helping the company beat third-quarter sales and profit estimates. This segment remains a key profit driver, though analysts caution that mainframe demand tends to be cyclical.
Some market watchers believe IBM still has room to regain momentum through acquisitions and integration of recent deals. Analysts at Evercore ISI pointed to mergers and acquisitions as a potential growth lever.
“M&A remains an underappreciated lever for the company,” they said. “Given IBM’s strong free cash flow and balance sheet, acquisitions could serve as a meaningful catalyst—particularly as they integrate the Hashi transaction.”
Last year, IBM acquired HashiCorp in a deal valued at $6.4 billion, strengthening its hybrid cloud and automation capabilities.
While Thursday’s stock dip highlights investor anxiety over the pace of IBM’s cloud expansion, analysts note that the company’s strategic repositioning toward AI, cloud infrastructure, and automation continues to gather long-term traction. For IBM, sustaining growth in its software portfolio may be the key to converting that optimism into consistent performance.