International Business Machines (IBM 1.24%) isn't a name investors typically associate with explosive growth. Yet the 114-year-old technology stalwart just delivered one of its fastest revenue increases in recent years, powered by an increasingly potent combination of hybrid cloud infrastructure, artificial intelligence (AI)-infused software, and consulting services that few competitors can match.
The Armonk, N.Y.-based company reported 2025 third-quarter revenue of $16.3 billion on Oct. 22, up 9% year over year and 7% in constant currency. Every business segment accelerated -- software grew 10%, consulting climbed 3%, and infrastructure rocketed 17% higher. More importantly, IBM's AI book of business now exceeds $9.5 billion, underscoring how enterprises are turning to Big Blue's decades of domain expertise to navigate their digital transformations.
But before you rush to buy shares, there's a complication worth considering.
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Red Hat's stumble clouds the picture
IBM's Red Hat division, the crown jewel acquired for $34 billion in 2019, grew revenue 12% in constant currency during the third quarter. The problem? That growth rate represents a 200-basis-point sequential deceleration from the second quarter's 14% pace, and shares fell as investors focused on the slowdown in hybrid cloud growth.
This matters because Red Hat serves as the connective tissue binding IBM's portfolio together. The hybrid cloud platform coordinates disparate computing environments for risk-averse enterprises, particularly in regulated industries like banking and healthcare, where moving mission-critical workloads requires surgical precision.
Management attributed the deceleration to normal quarterly variability rather than fundamental demand weakness, and is projecting midteens Red Hat growth for 2026. Still, when a company's most important growth engine taps the brakes -- even slightly -- investors should pay attention.
The HashiCorp boost
One bright spot partially offsetting Red Hat concerns is that IBM's automation software grew 22% in constant currency in the quarter. The increase included contributions from HashiCorp, the cloud infrastructure automation company IBM acquired for $6.4 billion, as IBM begins integrating the two platforms.
NYSE: IBM
Key Data Points
Wall Street analysts expect continued dynamics between Red Hat and HashiCorp to support double-digit growth for both hybrid cloud and automation software over the next five years. That's crucial because software carries far higher margins than consulting or infrastructure hardware, and a favorable business mix shift toward software should expand IBM's profitability over time.
The mainframe revival
IBM Z revenue surged 61% year over year in the quarter -- 59% in constant currency -- helped by the launch of z17, which adds AI-optimized capabilities and quantum-resistant security.
IBM Z continues to run many of the world's mission-critical workloads across banking, airlines, retail, and government, with industry sources noting that a large share of global transactions by value flows through the platform.
The business remains refresh-cycle driven, and analysts model low-single-digit growth for infrastructure over the longer run once the launch cycle normalizes.
Valuation leaves little room for disappointment
Here's where the investment thesis gets tricky. IBM trades at a rich forward multiple -- an estimated 23 times projected 2027 earnings -- for a company expected to grow revenue in the midsingle digits annually.
The Red Hat acquisition has proven transformational, unlocking significant economic value beyond its $34 billion purchase price. However, IBM's dividend consumes roughly 80% of earnings, limiting financial flexibility for additional large acquisitions. The company pays $1.68 per quarter -- $6.72 annualized -- yielding in the low-to-mid-2% range at the stock's current price
The premium pricing problem
IBM deserves credit for a genuinely impressive quarter that demonstrated the power of its integrated portfolio. The company is executing well on hybrid cloud adoption, automation software is accelerating, and even the mainframe business has found new life with AI capabilities.
But investment returns ultimately depend on the price you pay. Trading at an estimated 23 times projected 2027 earnings, IBM commands a rich forward multiple.
For prospective buyers, patience makes sense in this case. Wait for either a more attractive entry point or additional quarters demonstrating Red Hat can reaccelerate. After all, premium valuations leave little upside when companies simply meet expectations.
