IBM

IBM reported strong Q3 2026 earnings with 5% revenue growth and raised its free cash flow outlook, but the stock failed to bounce back significantly. While software revenue grew 9%, roughly half came from the Confluent acquisition, indicating organic growth of around 4%.

Management's guidance suggests slower growth ahead, with mainframe hardware sales falling 20% and transaction processing expected to be flat for the year. Despite challenges, the analyst remains bullish on IBM's long-term prospects in enterprise AI and quantum computing, citing its established customer base and reliable dividend.

IBM delivered better-than-expected Q3 2026 results with EPS up 11% to $2.95 and revenues growing 4.7% to $17.10 billion. Software revenues accelerated 9% driven by Red Hat (11% growth) and Data (20% growth), while free cash flow improved by $700 million to $3 billion.

The company raised full-year guidance for Software growth (7%-8%) and free cash flow (>$1 billion growth). However, Consulting growth remained modest and IBM Z revenues declined 19% year-over-year.

IBM's software segment demonstrated solid growth with 9% revenue increase and 8% recurring revenue growth to $24.9 billion in Q3 2026. However, the stock trades at a premium valuation of 19.28X forward earnings versus its 5-year median of 17.3X. While free cash flow improved and software momentum is positive, weak consulting growth of just 2%, elevated debt of $63.8 billion, and challenges in converting AI backlog into revenue limit the investment case. IBM holds a Zacks Rank #3 (Hold) rating.