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CANADA - 2025/09/27: In this photo illustration, the IBM (International Business Machines Corporation) logo is seen displayed on a smartphone screen. (Photo Illustration by Thomas Fuller/SOPA Images/LightRocket via Getty Images) SOPA Images/LightRocket via Getty Images IBM stock (NYSE: IBM) dropped 7% in after-hours trading on October 22, 2025, despite reporting a strong earnings performance. This decline was driven by investor worries regarding slowing growth in the crucial software segment of the company, which overshadowed an otherwise solid quarterly outcome. IBM announced adjusted earnings per share of $2.65, significantly surpassing the $2.45 consensus estimate, while revenue totaled $16.33 billion compared to the anticipated $16.09 billion. In this assessment, we analyze IBM’s Q3 results and consider whether the stock's drop creates an opportunity or signifies deeper worries about growth sustainability. Nevertheless, if you’re looking for a potential upside with less volatility than owning an individual stock like IBM, you might want to explore the High Quality Portfolio. This portfolio has significantly outperformed its benchmark, which includes a combination of the S&P 500, Russell, and S&P MidCap indexes, achieving returns of over 105% since its inception. What accounts for this success? Overall, HQ Portfolio stocks have delivered higher returns with less risk compared to the benchmark index; it’s been a steadier ride, as demonstrated by the HQ Portfolio performance metrics. Strong Beat Masked by Software Growth Concerns IBM achieved revenue growth of 9% year-over-year to $16.33 billion, marking its best quarterly performance in recent times. The adjusted earnings per share of $2.65 indicated a 15% increase compared to the previous year. What fueled this performance? The company saw strong demand for its latest AI-optimized mainframe systems and ongoing success in its automation software, which grew 24%. However, the software division's growth of 10% to $7.21 billion only met consensus expectations without exceeding them, raising concerns about the viability of IBM's AI-driven transformation. Even more concerning for investors, Red Hat's constant-currency revenue growth slowed to 12% from 14% in the last quarter, sparking analyst worries about this critical component of IBM's software strategy. Limited Upside Potential Despite Recent Decline Is IBM's valuation appealing after the post-earnings drop? With the stock currently trading around $270 and analyst price targets averaging $286, there seems to be limited upside potential even following the recent 7% decline. The stock has already gained around 30% year-to-date, showcasing investor confidence regarding IBM's AI positioning. However, at a trailing P/E ratio of approximately 45 times, IBM is trading at a somewhat high multiple in relation to its growth outlook. The challenge is that much of the AI-driven growth narrative may already be incorporated into the current valuation, leaving minimal margin for error should software growth continue to underperform. While management's updated guidance for full-year revenue growth of over 5% and free cash flow of $14 billion offers some reassurance, these projections seem increasingly ambitious given the slowdown in the software segment. Historical Volatility Suggests Caution During Downturns Could IBM experience further pressure amid wider market turmoil? Historical data indicates that IBM has shown relative resilience compared to growth stocks during significant market corrections. During the inflation surge of 2022, IBM's stock decreased by 20.2% from a peak of $145.21 on June 11, 2021, to $115.81 on November 26, 2021, while the S&P 500 suffered a peak-to-trough drop of 25.4%. Similarly, during the COVID-19 pandemic in 2020, IBM's stock fell 39.0% from a high of $149.08 on February 12, 2020, to $90.97 on March 23, 2020, in comparison to a 33.9% drop in the S&P 500. See – How Low Can IBM Stock Really Go – Although these declines were significant, IBM's performance in times of market stress has typically been more defensive than that of high-growth technology stocks, reflecting its established business model and dividend yield. MORE FOR YOU Remember, investing in a standalone stock without thorough analysis can be risky. Look into the Trefis Reinforced Value (RV) Portfolio, which has outperformed its all-cap stocks benchmark (a combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to deliver strong returns for investors. What is the reason for this success? The quarterly rebalanced mix of large-, mid-, and small-cap RV Portfolio stocks has provided a responsive means to capitalize on favorable market conditions while minimizing losses when markets decline, as outlined in RV Portfolio performance metrics. The Bottom Line Does IBM's current situation deserve investor confidence? The company’s capability to exceed earnings expectations while enhancing full-year guidance reflects operational strength, particularly in leveraging AI demand across its mainframe and automation sectors. With its AI business portfolio now surpassing $9.5 billion and strong free cash flow generation, IBM seems well-equipped to navigate the ongoing technology transition. Nevertheless, the deceleration in Red Hat's growth and the software division's failure to surpass expectations raise doubts regarding the sustainability of IBM's transformation narrative. Considering the limited upside potential based on current analyst targets and the stock’s already significant gains year-to-date, investors may wish to wait for clearer signs of software acceleration before increasing their holdings, even though the recent decline has created a more attractive entry point. Editorial StandardsReprints & Permissions
