IBM stock lost 26% over the past three months, a period in which the S&P 500 gained 4.8%. Management acknowledged on the July 22, 2026 earnings call that second-quarter results fell short of expectations, attributing the shortfall primarily to tens of large deals that failed to close on time. Executives stated that customers delayed rather than canceled these transactions, though they noted that only about a third of the delayed deals had closed within three weeks of the call. This partial recovery was viewed as a positive indication that the postponements were temporary, though not yet definitive proof.
The delay in deal closures coincided with a sharp slowdown in growth. Revenue in the latest quarter grew 1.1% from a year earlier, down from a 9.5% pace in the prior period. Mainframe sales fell 42% against a year-earlier quarter that included the launch of a new model. Management now expects 2026 revenue to grow between 4% and 5% before currency effects. Many clients redirected budgets toward servers, storage, and memory to secure scarce hardware ahead of expected price increases.
Software remains IBM's largest segment, generating $30.0 billion in fiscal 2025 sales and serving as the company's primary profit engine. This unit missed expectations in the second quarter, with management noting the shortfall was limited to an area sensitive to customer capital spending. If the latest quarter were repeated four times, a scenario management did not forecast, annual sales would total $68.6 billion, slightly below the $69.1 billion recorded over the last twelve months.
| Metric | Value |
|---|---|
| Latest Quarter Revenue Growth | 1.1% |
| Prior Period Revenue Growth | 9.5% |
| Mainframe Sales Change | -42% |
| Last Twelve Months Revenue | $69.1 billion |
| Last Twelve Months Free Cash Flow | $13.1 billion |
Profitability would also decline under a repeated-quarter scenario. Annual earnings would drop to $8.7 billion from $10.7 billion over the last twelve months. Consequently, IBM stock, currently priced at 19.4 times trailing earnings, would equate to a higher multiple based on the repeated quarter's results.
Strong cash flow provides some downside protection. IBM produced $13.1 billion in free cash flow over the last twelve months, significantly exceeding the $6.3 billion in dividends distributed in its last fiscal year. Management maintained its forecast to grow free cash flow by about $1 billion in 2026 despite the weak quarter. Annual recurring revenue also expanded to $24.6 billion in the second quarter, up 8% from a year earlier.
The balance sheet offers less cushion, with IBM carrying $65.3 billion in debt against $8.1 billion in cash and short-term investments. The next key indicator will be third-quarter revenue results, which are pending. Management guided for third-quarter growth to align with the full-year forecast of 4% to 5%, noting that a stronger dollar was expected to reduce growth by 1.5 points.
Software performance will provide a clearer measure of customer behavior. Management expects Software to grow 6% to 8% in 2026. The low end of this range assumes customers continue spending at second-quarter levels. If Software growth lands at or below 6% for the year, it would indicate that customers kept their money elsewhere through the second half.