International Business Machines (IBM), better known as IBM, continues to advance its multi-year transformation into a higher-growth hybrid cloud and artificial intelligence leader. Following several years of restructuring, portfolio optimization, and strategic divestitures, the company is now demonstrating clear operational and financial momentum.
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IBM is seeing sustained traction across its software, AI, and consulting businesses, supported by improving demand for automation, hybrid cloud modernization, and enterprise-scale AI solutions. At the same time, the company is delivering meaningful free cash flow growth, strengthening margins, and maintaining a disciplined, shareholder-friendly approach to capital allocation.
While IBM’s stock trades at a premium relative to many traditional IT peers, the valuation reflects its increasingly favorable business mix and its differentiated positioning in hybrid cloud, automation, and enterprise AI. With execution improving and long-term growth drivers accelerating, I believe IBM is well-positioned for continued outperformance. I remain bullish on the company’s long-term outlook.
Software Growth
In Q3 2025, software revenue reached $7.21 billion, up 9% year over year. The standout contributor was automation, which grew 22% year over year as enterprises continued investing in tools that optimize workflows and automate infrastructure. Red Hat growth did decelerate slightly, but IBM highlighted a 20% year-over-year increase in Red Hat backlog — a meaningful indicator of future revenue strength, especially as hybrid cloud adoption continues to rise.
I expect IBM’s software portfolio to maintain a roughly 10% CAGR over the next three years, driven largely by automation products and the cross-sell opportunities created by the HashiCorp acquisition. The combination of Terraform, Vault, and Red Hat OpenShift is proving extremely powerful for enterprises looking to modernize their cloud operations and strengthen security.
While Red Hat currently grows in the low-teens, I expect this to accelerate to the mid- to high-teens next year as consumption trends normalize and faster-growing components such as Ansible and OpenShift expand their contribution to the mix.
AI Demand Expands with Watsonx Adoption
AI is becoming increasingly central to IBM’s growth trajectory. The Watsonx platform — which includes Watsonx.ai for developing and deploying AI applications, ‘Watsonx.data’ for managing an open-source lakehouse, and ‘Watsonx.governance’ for monitoring and managing AI models — is gaining adoption across multiple verticals. Enterprises are increasingly relying on AI-driven automation, code generation, observability, and orchestration, areas where IBM’s platform is well-positioned.
IBM’s generative AI book of business continues to accelerate. Backlog has now grown to $9.5 billion, up from $7.5 billion in the prior period, reflecting broad-based demand for AI agents, assistant tools, and industry-specific AI workflows. In addition to its software offerings, IBM Consulting is increasingly engaged in AI transformation projects, amplifying the company’s reach across the enterprise tech stack.
IBM also recently announced a significant breakthrough: one of its quantum algorithms can now run on standard AMD chips — and it performs 10x faster than required. This development enables IBM to reduce hardware dependency, scale quantum development faster, and lower the cost of deploying quantum-enabled applications.
IBM is targeting a 2029 launch for its Starling quantum computer and is already working with more than 280 partners on commercial quantum use cases. While quantum is not a near-term revenue driver, early leadership positions IBM well for a long-term competitive moat.
Improving Free Cash Flow and Strong Capital Discipline
IBM raised its 2025 free cash flow guidance, reflecting improved execution and growing contributions from AI and software. Free cash flow is now expected to total around $14 billion in fiscal 2025, up from prior guidance of $13.5 billion.
The company is also implementing an internal AI-driven efficiency program designed to generate approximately $4.5 billion in cost savings by the end of fiscal 2025. These savings support EBITDA margin expansion, organic investment capacity, and continued dividend growth.
IBM’s Premium Remains Justified by Strong Growth
IBM trades at a premium relative to many legacy IT companies. Its P/E ratio of 27.72 compares with the sector median of 22.66, while its EV/Sales of 5.14 exceeds the sector median of 3.39. Using a variety of valuation models, including EV/EBIT multiples, Price/Sales multiples, and 10-year DCF growth, my proprietary model calculates a fair value of around $280 per share, implying 8% downside from current levels.
However, IBM’s premium reflects the company’s improving mix toward higher-growth, higher-margin businesses.
Over the past five years, IBM has posted EBITDA growth averaging 23.22% annually, compared to the sector median of 10.79%. EPS diluted growth of 22.55% also stands above the sector median of 12.74%. With automation, hybrid cloud, and enterprise AI adoption accelerating, I view IBM’s valuation as reasonable relative to its growth profile.
Is IBM a Buy, Sell, or Hold?
According to leading Wall Street analysts tracked by TipRanks, the consensus rating on IBM is Moderate Buy, based on 8 Buy, 5 Hold, and 1 Sell recommendations. The average price target is $300.58, implying ~
2% downside over the coming year. As things stand, analysts view the stock as fairly valued in the near term.
IBM Poised for Takeoff as Hybrid Cloud and AI Momentum Accelerate
IBM’s transformation into a modern hybrid cloud and AI powerhouse continues to gain meaningful traction. The company’s software portfolio is expanding at a steady and healthy pace, supported by strong enterprise demand for automation and intelligent infrastructure management. Adoption of the Watsonx AI platform is accelerating across multiple industries, reinforcing IBM’s positioning as a leading provider of enterprise-grade AI tools and services.
At the same time, IBM is delivering rising free cash flow, improving operational efficiency, and maintaining tighter cost discipline — all of which support both margin expansion and long-term investment capacity. The company is also laying the foundation for future leadership in quantum computing, with early breakthroughs that could meaningfully enhance its competitive moat over the next decade.
Although IBM currently trades at a premium compared to traditional IT peers, its valuation reflects a business mix shifting toward higher-growth, higher-margin segments. As organizations modernize infrastructure, adopt AI at scale, and increasingly rely on hybrid cloud architectures, IBM is well-positioned to capture a larger share of enterprise technology spending. I remain bullish on the company’s long-term outlook.