Why Isn’t IBM’s Stock Bouncing Back After Strong Earnings Results?

In July, IBM (IBM -0.99%) stock suffered the worst day in its 115-year history, falling about 25% after the company warned that customers had shifted spending away from its products.

The miss was clearly a matter of timing — a series of major contracts IBM was planning didn’t close by the end of the quarter, as its customers shifted spending to memory and storage products whose prices were increasing rapidly.

Three months later, IBM’s third-quarter report, which landed on Oct. 21, mostly backed that assessment up, and the company posted strong revenue and earnings. So, why isn’t the stock bouncing back?

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The good news was real

IBM’s revenue rose 5% to $17.1 billion in the third quarter, up from 1% growth in the second. Software grew 9% at constant currency, and operating earnings per share rose 11% to $2.95. Free cash flow was $3 billion, and management raised its full-year outlook to FCF growth of more than $1 billion.

CFO Jim Kavanaugh said about two-thirds of the large software deals that slipped in the second quarter closed in the third. Transaction processing software, which is tied to mainframes, swung from a 9% decline to 10% growth. That looks like delayed spending, not lost customers.

Some of that growth was bought

IBM closed its roughly $11 billion acquisition of Confluent in March, so that revenue wasn’t included in last year’s numbers. Confluent’s last reported quarterly revenue was $314.8 million, and IBM’s software revenue in Q3 2025 was $7.2 billion. So that would put IBM’s organic software growth in this quarter at around 4%. That’s real progress, but it’s less dramatic than 9%.

Management is also tapping the brakes. CEO Arvind Krishna said he doesn’t expect transaction processing to keep growing at double digits, and IBM expects that business to be flat for the year. Kavanaugh said the company is expecting about $32 billion in full-year software revenue. Subtract the $22.6 billion IBM has recognized through nine months, and the fourth quarter works out to roughly 4% growth, versus 8% in the third. Mainframe hardware sales also fell 20%, although that came against a very strong launch a year ago.

IBM is a long-term buy

I still like IBM as a long-term investment in AI and quantum computing, but I’m not ignoring the risks. IBM spent $11.4 billion on acquisitions this year, so cash fell $3.4 billion to $11.1 billion, and debt rose $2.6 billion to $63.8 billion. The dividend looks well covered — IBM paid $4.8 billion of dividends against $7.8 billion of free cash flow through nine months — but there’s less cushion for another big deal. Meanwhile, shareholders receive a dividend yield of about 2.7%.

IBM isn’t the kind of technology stock that’s going to grab headlines like Nvidia or Palantir, but that doesn’t mean investors should overlook it. The company has established itself as an important player in enterprise AI, while its hybrid cloud business and consulting operations provide opportunities for long-term growth.

There are challenges, particularly as businesses remain cautious about technology spending. But IBM has something many high-flying AI stocks don’t — an established customer base, consistent cash flow, and a reliable dividend.

That’s why I remain bullish on Big Blue, despite the market’s muted reaction to its third-quarter report.