IBM Stocks Tumble on Cloud Growth Deceleration Despite Earnings Beat

TLDR

• IBM shares dropped over 6.5% in premarket trading on Thursday after the company reported slowing growth in its core cloud software segment
• Red Hat hybrid cloud unit sales growth declined to 14% from 16% in the previous quarter, raising concerns about IBM’s ability to capture AI-driven cloud demand
• Despite the cloud slowdown, IBM beat third-quarter sales and profit estimates and raised its revenue outlook for the fiscal year
• The infrastructure segment showed strength with a 17% revenue increase to $3.56 billion, driven by the mainframe business
• IBM stock has climbed about 30% year-to-date and trades at a forward P/E ratio of 23.85, higher than competitor Accenture’s 17.95

IBM shares took a beating in premarket trading Thursday, falling more than 6.5% after the tech company reported a slowdown in its cloud software business. The drop came even though the company raised its full-year revenue guidance.

International Business Machines Corporation, IBM

The sell-off centers on Red Hat, IBM’s hybrid cloud unit. Sales growth in this division slowed to 14% in the third quarter. That’s down from 16% growth in the previous quarter.

Investors are getting nervous about whether IBM can keep up with rivals in the cloud and AI race. The cloud software segment is under the microscope because it represents a large portion of IBM’s earnings power.

J.P. Morgan analysts pointed out that IBM’s software performance carries more weight than other parts of the business. They noted the segment’s outsized contribution to overall earnings and company value.

The market reaction shows how much pressure companies face to deliver on AI and cloud promises. Investors have poured money into tech stocks this year based on expectations of strong growth from artificial intelligence applications.

IBM’s stock has jumped about 30% in 2025 as traders bet on its cloud and AI initiatives. The company now trades at a forward price-to-earnings ratio of 23.85. That’s higher than Accenture’s multiple of 17.95.

Infrastructure Delivers While Software Stumbles

The infrastructure segment provided some good news in the quarterly results. Revenue in this division, which includes the mainframe business, rose 17% to reach $3.56 billion.

This infrastructure strength helped IBM beat Wall Street expectations for both sales and profit in the third quarter. The company also increased its revenue forecast for the current fiscal year.

But the positive results in other areas couldn’t overcome investor worries about the cloud slowdown. The market clearly wants to see acceleration in IBM’s software and cloud businesses, not deceleration.

Next year presents another challenge for the company. IBM will be comparing against peak mainframe growth rates from the prior year. Analysts say the company will need better software performance to maintain healthy overall growth.

M&A Strategy Could Provide Growth Catalyst

Some analysts see potential upside from IBM’s acquisition playbook. Evercore ISI pointed to mergers and acquisitions as an “underappreciated lever” for the company.

IBM completed a $6.4 billion purchase of HashiCorp last year. The company is currently working to integrate that acquisition into its operations.

Analysts noted IBM’s strong free cash flow and solid balance sheet position. These financial resources give the company flexibility to pursue deals that could boost growth rates.

The Hashi transaction integration is progressing well according to analyst commentary. Future acquisitions could serve as a catalyst if organic growth in the software segment remains under pressure.

IBM’s premarket trading showed shares at $266.99, down $21.16 from the previous close of $287.51. The company beat third-quarter estimates while raising its fiscal year revenue outlook despite the cloud growth concerns.

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