IBM shares tumbled more than 6.5% in premarket trading Thursday after the company reported slower growth in its key cloud software division, sparking investor concerns about its ability to capitalize on the AI-driven surge in cloud computing. Despite raising its full-year revenue outlook, the weaker performance in its cloud segment overshadowed otherwise solid quarterly results.
The slowdown came from IBM’s hybrid cloud unit, Red Hat, where sales growth slipped to 14% from 16% in the previous quarter. Analysts at J.P. Morgan said the company’s software business is “critical to IBM’s long-term earnings potential,” adding that it now needs a rebound in software performance to sustain growth as mainframe sales reach their peak next year.
IBM’s stock has climbed about 30% this year amid optimism around its AI and hybrid cloud offerings, but the latest results reignited concerns about whether Big Blue can keep pace with faster-moving rivals in the AI cloud space. The company currently trades at a forward P/E ratio of 23.85, compared with 17.95 for competitor Accenture.
Even so, IBM’s infrastructure segment, which includes its mainframe business, provided a bright spot with a 17% revenue jump to $3.56 billion, helping the company exceed third-quarter sales and profit estimates. Analysts also noted that IBM’s acquisition of HashiCorp, a $6.4 billion deal announced last year, could strengthen its long-term growth prospects.
Evercore ISI analysts said IBM’s “strong cash flow and balance sheet” leave room for more mergers and acquisitions — an “underappreciated lever” that could help the company reignite software momentum and investor confidence.
