IBM (IBM)

Technology and consulting giant IBM (NYSE:IBM) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 9.1% year on year to $16.33 billion. Its non-GAAP profit of $2.65 per share was 8.3% above analysts’ consensus estimates.

Company Overview

With a corporate history spanning over a century and once known for its iconic mainframe computers, IBM (NYSE:IBM) provides hybrid cloud computing platforms, AI solutions, consulting services, and enterprise infrastructure to help businesses modernize their operations.

IT Services & Consulting companies stand to benefit from increasing enterprise demand for digital transformation, AI-driven automation, and cybersecurity resilience. Many enterprises can't attack these topics alone and need IT services and consulting on everything from technical advice to implementation. Challenges in meeting these needs will include finding talent in specialized and evolving IT fields. While AI and automation can enhance productivity, they also threaten to commoditize certain consulting functions. Another ongoing challenge will be pricing pressures from offshore IT service providers, which have lower labor costs and increasingly equal access to advanced technology like AI.

IBM competes with cloud and software providers like Microsoft (NASDAQ:MSFT), Amazon Web Services (NASDAQ:AMZN), and Oracle (NYSE:ORCL); consulting firms such as Accenture (NYSE:ACN) and Capgemini; and hardware manufacturers including Dell Technologies (NYSE:DELL) and Hewlett Packard Enterprise (NYSE:HPE).

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $65.4 billion in revenue over the past 12 months, IBM is a behemoth in the business services sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices. However, its scale is a double-edged sword because it’s challenging to maintain high growth rates when you’ve already captured a large portion of the addressable market. For IBM to boost its sales, it likely needs to adjust its prices, launch new offerings, or lean into foreign markets.

As you can see below, IBM’s 1.3% annualized revenue growth over the last five years was sluggish. This shows it failed to generate demand in any major way and is a rough starting point for our analysis.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. IBM’s annualized revenue growth of 3.4% over the last two years is above its five-year trend, but we were still disappointed by the results.

We can dig further into the company’s revenue dynamics by analyzing its most important segment, Software. Over the last two years, IBM’s Software revenue averaged 8% year-on-year growth. This segment has outperformed its total sales during the same period, lifting the company’s performance.

This quarter, IBM reported year-on-year revenue growth of 9.1%, and its $16.33 billion of revenue exceeded Wall Street’s estimates by 1.4%.

Looking ahead, sell-side analysts expect revenue to grow 5.7% over the next 12 months, an improvement versus the last two years. This projection is above average for the sector and suggests its newer products and services will spur better top-line performance.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

IBM has managed its cost base well over the last five years. It demonstrated solid profitability for a business services business, producing an average operating margin of 13.8%.

Analyzing the trend in its profitability, IBM’s operating margin rose by 7.2 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, IBM generated an operating margin profit margin of 14.9%, up 2.4 percentage points year on year. This increase was a welcome development and shows it was more efficient.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

IBM’s EPS grew at an unimpressive 4.2% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 1.3% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of IBM’s earnings can give us a better understanding of its performance. As we mentioned earlier, IBM’s operating margin expanded by 7.2 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For IBM, its two-year annual EPS growth of 8.4% was higher than its five-year trend. Accelerating earnings growth is almost always an encouraging data point.

In Q3, IBM reported adjusted EPS of $2.65, up from $2.30 in the same quarter last year. This print beat analysts’ estimates by 8.3%. Over the next 12 months, Wall Street expects IBM’s full-year EPS of $10.97 to grow 8.6%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

IBM has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 17.5% over the last five years.

Taking a step back, we can see that IBM’s margin expanded by 4.7 percentage points during that time. This is encouraging because it gives the company more optionality.

IBM’s free cash flow clocked in at $2.81 billion in Q3, equivalent to a 17.2% margin. This result was good as its margin was 3.4 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

IBM historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 11.4%, somewhat low compared to the best business services companies that consistently pump out 25%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Fortunately, IBM’s ROIC averaged 3.1 percentage point increases over the last few years. This is a good sign, and we hope the company can continue improving.

IBM reported $14.86 billion of cash and $66.57 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $18.21 billion of EBITDA over the last 12 months, we view IBM’s 2.8× net-debt-to-EBITDA ratio as safe. We also see its $384 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see IBM beat analysts’ revenue and EPS expectations this quarter. The company also raised full-year revenue and free cash flow guidance. Overall, we think this was a decent quarter with some key metrics above expectations. The market seemed to be hoping for more, and the stock traded down 4.7% to $274.65 immediately after reporting.

Updated: December 4, 2025 at 10:55 PM EST

When considering an investment in IBM, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

IBM isn’t a terrible business, but it isn’t one of our picks. To begin with, its revenue growth was weak over the last five years. And while IBM’s scale makes it a trusted partner with negotiating leverage, its unimpressive EPS growth over the last five years shows it’s failed to produce meaningful profits for shareholders.

IBM’s P/E ratio based on the next 12 months is 25x. This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $290.89 on the company (compared to the current share price of $308.28), implying they don’t see much short-term potential in IBM.