IBM's Software Growth Sped Up and Its Stock Barely Moved. I'd Start Buying.

International Business Machines (IBM) reported a 9% year-over-year growth in software revenue for the third quarter, surpassing its initial expectations. This marked a significant improvement from the 5% growth seen in the second quarter, with the constant-currency growth reaching 9% in the third quarter. The software segment, which accounts for around 46% of IBM's revenue and 65% of its segment profit, played a crucial role in this growth.

Transaction processing, a key part of the software segment, contributed most of the quarter's growth with a 10% increase in constant currency. Software's segment profit rose by 15% year-over-year to approximately $2.7 billion, and its profit margin widened to 35% from 33%. Despite the software segment's strong performance, IBM's stock price barely moved, closing at $252.11, which is about 23% below its June record of $329.23.

The CFO, Jim Kavanaugh, attributed the software revenue acceleration to a mix of timing and new business deals. Despite the unchanged revenue forecast for the year, IBM expects free cash flow to increase by over $1 billion for 2026. The company's recurring revenue, a crucial metric, grew by 8% to $24.9 billion, still below the 10% target but expected to reach double-digit growth in the fourth quarter.

With a market value of around $235 billion, IBM trades at roughly 15 times its free cash flow, and shares have a price-to-earnings ratio of about 19, compared to 25 times earnings at the June record. Despite the recent flat stock price, the report suggests that IBM's software growth is promising, and the author recommends starting to buy IBM stock, possibly in smaller quantities, with the expectation that recurring revenue will improve in the fourth quarter.