IBM Beats Q3 and Lifts Cash Outlook, but 2027 Software Doubts Linger

IBM beat on the top and bottom lines, raised its free cash flow forecast, and watched its stock fall anyway. That's the mixed reception for Big Blue's third-quarter report, and it tells you where investors' heads are.

Shares dropped about 5% in premarket trading Thursday to roughly $238.85, leaving the stock down around 15% for the year, according to MarketWatch via Morningstar. The S&P 500 is up about 13% over the same stretch.

The quarter itself was solid. Revenue came in at $17.1 billion and adjusted EPS was $2.95 against estimates in the $2.85 to $2.87 range, as CNBC reported.

Software was the bright spot. Revenue reached $7.8 billion, ahead of the $7.66 billion StreetAccount consensus, and infrastructure came in at $3.70 billion, up 4% and also above forecasts.

Consulting was flat at $5.34 billion, just shy of expectations, and adjusted gross margin of 58.5% was narrower than the 59.1% analysts wanted. Not a disaster, but not a clean sweep.

On cash, IBM now expects full-year free cash flow to grow by more than $1 billion, up from roughly $1 billion in July. It held its 2026 constant-currency revenue growth forecast at 4% to 5%.

"AI is increasingly embedded in broader transformations our clients are undertaking, representing about 30% of our consulting revenue in the quarter and 35% of our backlog." — Jim Kavanaugh, CFO, IBM

This quarter also had a redemption element. In July, IBM stumbled when big software deals slipped. CFO Kavanaugh said about two-thirds of those delayed deals closed in Q3, and transaction processing, the mainframe-linked software line, swung from a decline to growth.

Analysts liked it. Per Stocktwits, citing TheFly, Jefferies lifted its target to $280 from $270, Citi to $280 from $245, and Barclays to $277 from $262. Stifel went to $260 from $235, and Morningstar nudged its fair value to $230 from $225.

So why the red? Because the market is already looking at 2027. Jefferies' Brent Thill said the key question is whether IBM can sustain near-double-digit software growth next year, which would take stronger organic execution in automation and data.

Motley Fool's analysis adds some cold water. IBM closed its roughly $11 billion Confluent acquisition in March, so about half of that 9% software growth is acquired. The Fool pegged organic growth near 4%, and management's own full-year software target implies about 4% in Q4.

Management is tempering things, too. CEO Arvind Krishna said he doesn't expect transaction processing to keep growing at double digits, and IBM remains cautious about giving 2027 guidance. Morningstar's view is that further acquisitions would be needed to hit management's long-term double-digit software target.

The balance sheet is worth a look. IBM spent $11.4 billion on acquisitions this year, cash fell to $11.1 billion and debt rose to $63.8 billion. The dividend, currently yielding about 2.7%, is well covered by free cash flow, but there's less cushion for another large deal.

For investors, the setup looks more like a show-me story than a broken one. You're getting a stock that's down double digits this year, a covered dividend, and a software business that's re-accelerating, with real questions about how much of that is durable.

What to watch: Red Hat and OpenShift growth, which management said it's comfortable keeping in double digits in Q4, any quantification of mainframe monetization promised for January, and the Q4 software number against that roughly 4% implied. If those hold up, the pullback starts to look like an opportunity; if they slip, the 2027 skeptics win.

Bottom line: IBM fixed the July problem. Now it has to prove the fix lasts.