IBM's slowing cloud growth eclipses upbeat third-quarter results

IBM on Wednesday recorded a slowdown in growth in its key cloud software segment, overshadowing booming AI-driven demand for the company's new mainframe that pushed third-quarter sales and profit above market estimates.

The company's shares were down 5% in extended trading.


Slower growth in IBM's cloud segment, housed within its software unit, raised alarm bells across investors betting heavily on Big Blue's ability to benefit more from booming demand for cloud services, as artificial intelligence adoption rises.

Sales growth in the hybrid cloud unit - known as Red Hat - decelerated to 14% from 16% growth in the previous quarter, stealing the spotlight from third-quarter revenue of $16.33 billion, which beat analysts' average estimate of $16.09 billion, according to LSEG data.

The hybrid cloud unit is expected to return to mid-teen percentage growth, or close to that level, entering 2026, CEO Arvind Krishna said during a post-earnings call.

"A slowdown in Red Hat revenue and software sales ... will disappoint some that were hoping for accelerating growth in what is a high-margin segment," said Michael Ashley Schulman, chief investment officer at Running Point Capital.

IBM shares have risen about 30% so far this year and the stock trades with a forward-12-month forward price-to-earnings ratio of about 24, compared with a multiple of about 18 for rival Accenture.

"The stock is priced to perfection," said Dan Morgan, portfolio manager at Synovus Trust, an IBM investor.

"There was little wiggle room for any metric to come up short."

AI mainframe a bright spot

The infrastructure segment, housing its mainframe, saw revenue rise 17% to $3.56 billion in the quarter.

The new mainframe, which is powered by chips specialized for AI applications, is being widely used by the financial industry, allowing for the maintenance of strict data residency and encryption rules as they work on adopting AI tech, CFO Jim Kavanaugh told Reuters.

IBM's AI book of business grew to $9.5 billion, up $2 billion from the second quarter.

IBM raised its outlook for the current fiscal year, expecting revenue to grow more than 5% at constant currency, up from its prior forecast of at least 5% growth.