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International Business Machines (IBM) has had an impressive year so far, delivering a 19% gain in 2025, far outpacing the S&P 500 Index ($SPX), which has dipped around 3%. The driving forces behind IBM’s growth include its thriving software business and significant artificial intelligence (AI)-led opportunities, which have helped boost investor confidence in the stock.
The technology and consulting giant’s software segment has been a key growth driver, with revenue expanding by 10.4% in the fourth quarter to $7.8 billion. Red Hat, a major component of IBM’s software business, saw a 16% revenue increase, reflecting strong demand for its hybrid cloud solutions. Other areas like automation grew 15%, transaction processing 10%, and both data & AI and security posted 4% gains.
Red Hat continues to thrive, with six straight quarters of double-digit booking growth. This reflects increasing demand for OpenShift, IBM’s hybrid cloud platform, and Ansible automation tools, which help businesses modernize their applications and optimize IT spending. IBM is witnessing increased customer adoption of OpenShift Virtualization.
Beyond subscription-based growth, IBM’s consumption-based services are also rebounding, further strengthening the company’s revenue streams. Meanwhile, its generative AI business continues to expand, with its book of business now exceeding $5 billion since inception up $2 billion from the previous quarter. Notably, 20% of this revenue comes from software, while 80% stems from consulting.
All these factors have pushed IBM stock beyond the $260 mark, where it now trades at a forward price-earnings multiple of 23.06x and a price-to-sales ratio of 3.67x. As the company’s valuation has become somewhat stretched, let’s look at IBM’s business fundamentals and growth outlook to determine whether it’s a buy, sell, or hold near the current market price.
IBM’s Growth and Free Cash Flow Outlook
IBM’s growth prospects remain compelling, especially its software business, which is poised to deliver solid financials. Within software, Red Hat’s revenue under contract continues to expand in the mid-teens, reflecting a strong bookings pipeline. Moreover, IBM’s recurring revenue base has been resilient, with the hybrid platform and solutions ARR reaching $15.3 billion, up 11%. Meanwhile, transaction processing is benefiting from increasing demand, strong renewal rates, and contributions from IBM’s AI-driven Watsonx Code Assistant.
Moreover, IBM’s investments in generative AI are already paying off, with its software AI book of business surpassing $1 billion in inception-to-date revenue. Furthermore, acquisitions such as StreamSets and webMethods have bolstered IBM’s capabilities, and the recent acquisition of Neural Magic strengthens its AI performance and model optimization efforts. Additionally, the upcoming HashiCorp acquisition is expected to further enhance IBM’s software portfolio.
IBM’s outlook for 2025 is promising. Its top-line growth rate, in constant currency, is forecast to exceed 5%. While currency fluctuations pose some risks, IBM’s accelerating business momentum offers a strong counterbalance.
Within Software, IBM projects double-digit revenue growth driven by portfolio strength, continued innovation, and acquisition synergies. Red Hat’s performance remains robust, with anticipated mid-teens growth.
Consulting is also expected to accelerate, supported by record backlog levels, strong GenAI business momentum, and increasing demand for digital transformation solutions. Meanwhile, IBM’s Infrastructure segment is poised to contribute positively to overall revenue growth, particularly with a new mainframe launch planned for mid-2025.
IBM’s financial discipline remains a key advantage. The company expects to expand its operating pre-tax margin by over 50 basis points in 2025, supported by an improving portfolio mix and productivity enhancements. While acquisitions may introduce some dilution, overall profitability should remain on an upward trajectory. Free cash flow is projected to reach $13.5 billion, with double-digit adjusted EBITDA growth as a primary driver.
The Bottom Line
IBM’s strong software business and expanding AI opportunities make it a compelling long-term investment.
However, IBM stock has a “Moderate Buy” consensus rating from Wall Street analysts, signaling that some caution may be warranted. At its current price of around $260, which is close to its 52-week high, a pullback could provide a better entry point.
