Shares of International Business Machines (NYSE:IBM) trade around $234 as I write, two days before the company posts third-quarter results on Wednesday, Oct. 21. The stock has shed about 21% of its value so far in 2026, and it is 29% below the all-time high of $329.23 it closed at on June 2.
The hardest hit was on July 14, when IBM said second-quarter revenue had come in below its own expectations. Shares sank 25% that day.
Missed AI’s “Act 1”? Act 2 Could Be 14x Bigger. Most investors think they missed the AI boat because they didn’t buy Nvidia in 2005. But according to our analysts, we’re only at the end of “Act 1″—the R&D phase. “Act 2” is the global rollout. Continue »
What bothers me most about that quarter is software. IBM’s software revenue grew 5% year over year. But without acquisitions, it was flat, according to CFO James Kavanaugh.
With the stock this far below its high and a dividend yielding almost 3%, is IBM worth buying before Wednesday’s report?
Image source: The Motley Fool.
Software growth slowed sharply
Software is IBM’s biggest segment by both revenue and profit. It pulled in $7.8 billion in second-quarter sales, and its segment profit climbed 9% year over year to $2.5 billion. But its revenue growth has slowed for two straight quarters. The segment’s revenue grew 14% year over year in the fourth quarter of 2025. Growth then eased to 11% in the first quarter of 2026, and the second quarter brought just 5%. And acquisitions, such as data-streaming firm Confluent, which IBM bought in March, provided all of that latest 5%.
Management blamed timing. In the last weeks of June, many customers moved budgets to hardware to lock in supply before expected price rises. And “tens of large deals failed to close on the timelines we expected,” Kavanaugh said on IBM’s July 22 call with analysts.
This hurt transaction processing, the software linked mainly to IBM’s mainframes, which slid 8%.
Of course, there were bright spots. Red Hat, IBM’s hybrid cloud business, grew 11%, and data software grew 19%. And CEO Arvind Krishna said around a third of the delayed deals closed in the first three weeks of the third quarter.
But a quarter with no organic software growth is hard to shrug off. Software is arguably the part of IBM that its growth story relies on most.
The report needs software to pick back up
IBM now expects software revenue growth of 6% to 8% this year in constant currency. Kavanaugh called the low end an anchor that assumes recent spending patterns hold through the second half. The high end, he said, means “a second half that’s approaching double digits.”
