International Business Machines (IBM 0.93%) reported impressive third-quarter fiscal 2025 results (ended Sept. 30), with revenue and earnings surpassing consensus estimates. Sales were up 7% year over year (at constant currency) to $16.3 billion, the fastest growth in several years. The company's non-GAAP operating margin also improved by two percentage points to 18.6%. An improving revenue base and revenue mix, as well as higher productivity, is helping drive profitability.
Management now expects IBM's revenue to rise at 5% year over year on a constant currency basis. Free cash flow is expected to be $14 billion in fiscal 2025, up from the prior estimate of $13.5 billion. Improving guidance highlights management's confidence in the company's growth trajectory and cash generation capabilities.
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Quantum deal
Although IBM's recent earnings numbers have been stellar, an even more crucial long-term catalyst is now unfolding in front of our eyes. The company has partnered with Advanced Micro Devices (AMD +0.68%) to develop quantum-centric supercomputing architectures by combining quantum computers with high-performance computing. This system will enable IBM's quantum stack to run on AMD's central processing units (CPUs), graphics processing units (GPUs), and other chip technologies, creating a bridge between traditional and quantum computing.
According to MarketsandMarkets, the global quantum computing market is estimated to grow from $3.5 billion in 2025 to $20.2 billion in 2030. The combination of quantum computing, high-performance computing, and artificial intelligence (AI) can help solve complex problems across molecular modeling, drug discovery, materials discovery, financial risk simulation, and logistics. These workloads are complex to solve for classical computing systems.
The deal with AMD can accelerate the commercialization of IBM's quantum computing technologies without requiring heavy investment in new hardware. If IBM can integrate quantum capabilities into existing data centers using AMD chips, it can dramatically improve enterprise adoption of these technologies to solve real-world problems. Coupled with IBM's plans to build a fault-tolerant quantum computer (which can operate correctly despite errors ) by 2029, the company could start unlocking new revenue streams from this emerging business.
NYSE: IBM
Key Data Points
Digital Asset Haven
Another exciting development for IBM is the launch of its new platform called Digital Asset Haven . This helps financial institutions, organizations, governments, banks, and central banks manage their digital assets, including real-asset tokens, stablecoins, and digital currency. The platform also offers authorization, transaction management, and compliance services across more than 40 public and private blockchains. With its Digital Asset Haven, IBM is now competing with other major cloud service providers, such as Amazon, Microsoft, and Oracle, which also offer blockchain-based services.
According to a report by Boston Consulting Group and ADDX, the market for tokenization of global illiquid assets will grow from 3.1 trillion in 2025 to 16.1 trillion in 2030. While tokenized illiquid assets are estimated to be 2.5% of global GDP in 2025, they will account for nearly 10% of global GDP in 2030.
Given the massive addressable market and IBM's existing relationships with over 90 global banks, Digital Asset Haven can meaningfully add to IBM's revenue in the coming quarters.
AI momentum
IBM's AI business is rapidly gaining traction. The company's generative AI business had a contracted backlog of $9.5 billion at the end of the third quarter. Of this, nearly $1.5 billion was for new AI-related consulting work. The company has also deployed AI agents to handle 200 consulting projects. This highlights the deepening adoption of IBM's AI capabilities by enterprises.
Its core software and hybrid infrastructure business is also performing impressively. The company's automation revenue was up 22% year over year, while IBM Z (mainframe) revenue was up 59% in Q3. The flagship z17 mainframe has been purpose-built for AI and hybrid cloud workloads, and is becoming a significant growth driver for IBM.
AI is also helping drive productivity and cost efficiencies. The company expects to achieve $4.5 billion in annual savings in 2025, driven by AI and automation technologies. These savings can be reinvested in growth initiatives and used to generate even more free cash flow.
Valuation
IBM shares are currently trading at 25.8 times forward earnings, which seems justified by reaccelerating revenue growth, improving margins, strong free cash flows, and multiple long-term growth catalysts.
Analysts expect the company's adjusted earnings per share (EPS) to grow from a projected $11.36 in fiscal 2025 to $12.08 in fiscal 2026. With IBM transforming from a legacy IT infrastructure and services provider to an AI- and hybrid-cloud-focused company, its forward price-to-earnings (P/E) multiple may expand toward its historical five-year average of 42.3.
We assume IBM's forward P/E will settle in the range of 28 to 30 by the end of 2026, bringing it more in line with that of technology giants such as Nvidia at 29.6, Microsoft at 29, and Amazon at 29.8. Hence, IBM's share price may fall between $338 and $362, implying an upside potential of roughly 8% to 15.7%. While the returns may not be explosive, IBM shows that it can steadily appreciate in the coming year.
Hence, this may be a good time to pick a small stake in this tech stock, which is backed by robust financials, an improving revenue mix, and strong AI and quantum computing tailwinds.
