Why Isn't IBM's Stock Bouncing Back After Strong Earnings Results?
IBM’s third-quarter report was strong, but the details explain why investors aren’t rushing back.
In the three months following IBM's poor earnings report in July, the company's stock experienced a significant drop of nearly 25%. This decline was attributed to customers shifting their spending away from IBM's products, particularly towards memory and storage solutions with rapidly rising prices. However, three months later, IBM's third-quarter report for October 21 showed strong revenue and earnings, largely validating the previous assessment.
Despite a 5% increase in revenue to $17.1 billion from a 1% growth in the previous quarter, the stock has not rebounded. Software revenue grew by 9% at constant currency, while operating earnings per share rose by 11% to $2.95. Free cash flow stood at an impressive $3 billion, leading management to raise their full-year outlook for free cash flow growth to over $1 billion.
A portion of the large software deals that missed in the second quarter were completed in the third, including IBM's acquisition of Confluent in March. Excluding Confluent's revenue, IBM's software revenue in Q3 2025 was $7.2 billion, resulting in around 4% organic software growth. However, IBM's CEO, Arvind Krishna, expects transaction processing revenue to grow at a slower pace, with the business expected to remain flat for the year.
CFO Jim Kavanaugh noted that about two-thirds of the large software deals from the second quarter closed in the third, while Transaction processing software saw a shift from a 9% decline to 10% growth in the third quarter. Despite these positive developments, IBM plans to spend $11.4 billion on acquisitions this year, leading to a decrease in cash reserves to $11.1 billion and an increase in debt to $63.8 billion.
While IBM still offers a dividend yield of about 2.7% and maintains an established customer base, consistent cash flow, and a reliable dividend, the market's muted reaction to its third-quarter report reflects the company's challenges amid cautious technology spending. Despite these concerns, the author remains bullish on IBM, highlighting its long-term potential in AI and quantum computing.
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