International Business Machines Corporation (NYSE:IBM) isn’t a typical growth stock. Investors won’t buy IBM because they expect its revenue to suddenly start growing 20% a year. The appeal is elsewhere. IBM has a large software business, recurring revenue, consulting operations, exposure to AI, and a long track record of generating cash. That combination makes its valuation worth looking at more closely.
IBM shares closed at $221.29 on October 6, 2026. At that price, the stock trades at about 19.7 times trailing earnings and 17.3 times forward earnings. The company also pays $6.76 a year in dividends, giving the stock a yield of roughly 3.1%. For a mature technology company, that’s not an obviously cheap valuation. But it’s also not particularly demanding if IBM can keep growing earnings at a high-single-digit pace.
The Latest Numbers Tell a Mixed Story
International Business Machines Corporation’s second-quarter 2026 results were a bit of a mixed bag. Revenue rose just 1% year over year to $17.2 billion. GAAP net income fell 1% to $2.2 billion, while GAAP EPS came in at $2.27. On an operating basis, though, EPS increased 5% to $2.93.
The difference becomes clearer when you look at the individual businesses. Software is doing most of the heavy lifting. Revenue increased 5% to $7.8 billion. Red Hat grew 11%, while the data business was up 19%. Consulting was much less exciting. Revenue came in at $5.3 billion, essentially unchanged from last year. Then there’s infrastructure, which remains a weak spot. Revenue fell 7% to $3.8 billion, with IBM Z revenue plunging 42%.
So IBM’s growth story isn’t coming from everywhere. It’s increasingly about whether the software business can keep gaining momentum while the weaker parts of the company become less important. Red Hat is a big part of that argument. Its hybrid cloud business gives IBM exposure to areas where companies are still spending, while its position in enterprise software gives IBM a way to benefit from AI adoption without having to compete directly with the companies building AI chips and data centers. Could IBM’s shifting business mix be strengthening its competitive moat? This analysis explores whether IBM’s economic moat is widening or narrowing.
AI Could Actually Help IBM
There has been plenty of concern that AI could eventually hurt companies like IBM. The argument is fairly straightforward. If businesses can use AI to automate certain tasks, they may need fewer consultants and less traditional IT work.
But there’s another side to it. Most large companies aren’t starting from scratch. They have years, sometimes decades, of existing software, databases, and IT infrastructure. Adding AI to that setup isn’t as simple as plugging in a new tool. Someone still has to make everything work together. That’s an area where IBM could benefit.
Companies need help managing their data, connecting AI applications to existing systems, and figuring out how to move from AI experiments to actual business use. IBM’s software and consulting businesses are already positioned around many of those needs. Accenture’s latest results provided another reason for optimism. Its consulting revenue reached $9.28 billion, beating expectations and helping push back against concerns that AI would immediately destroy demand for IT services. IBM shares also gained following those results.IBM doesn’t need AI to transform it into a high-growth company. Even a more modest benefit could make a difference to earnings over time.
Free Cash Flow Gives Investors Something Today
One of the more attractive parts of IBM’s valuation is that investors aren’t relying entirely on future growth. IBM generated $2.5 billion in free cash flow in the second quarter and $4.8 billion during the first half of 2026. It returned $1.6 billion to shareholders through dividends during the quarter. The company’s growing dividend makes it popular among investors. Btw, there are 7 stocks that rank higher than IBM in terms of dividend growth. Find here.
At the current market value, that works out to a free-cash-flow yield of about 6.6%. The earnings yield is around 5.1%. That changes the way I would look at the valuation. IBM isn’t a stock where the entire investment case rests on AI eventually producing huge profits. The business is already producing billions of dollars in cash.
The dividend is another part of the return. A 3.1% yield isn’t enough to make IBM a substitute for a Treasury bond, especially at today’s interest rates, but it does give shareholders some income while they wait for the business to grow.
Treasury Yields Make the Valuation Harder to Ignore
This is probably the biggest issue for IBM investors right now. The 10-year Treasury yield recently moved above 5.3%, while the 30-year yield reached roughly 5.7%, its highest level since 2002. When investors can get those kinds of yields from government bonds, a stock needs to offer more than just a decent dividend. It needs growth, and that’s where IBM’s expected earnings growth becomes important. Current estimates call for EPS to grow about 7.4% annually over the next three years. If IBM can actually deliver that, a forward P/E of around 17 times doesn’t look unreasonable.
However, there isn’t a huge cushion if the growth disappoints. If earnings growth ends up closer to 3% or 4%, IBM’s valuation could look much less appealing compared with Treasury yields. If software, Red Hat and AI-related demand help the company maintain high-single-digit earnings growth, the current multiple looks much easier to justify. There are other options that offer better yield than IBM. Read here.
The Bottom Line
IBM isn’t cheap in the traditional sense. A stock trading at roughly 17 times forward earnings isn’t being priced for failure. But IBM doesn’t need spectacular growth to justify that valuation either. The latest results show why the stock is interesting. Software is still growing, Red Hat is expanding at a double-digit rate, and the data business is performing well. Consulting hasn’t really picked up yet, while infrastructure continues to weigh on the overall numbers.
At the same time, IBM keeps producing a substantial amount of free cash flow. For investors, the key question is whether the company can keep earnings growing in the high-single-digit range as its software business expands and AI creates more demand for its products and services. If it can, the current valuation looks fairly reasonable.
If growth slows to the low-single digits, the picture changes. With Treasury yields already so high, investors have a much better alternative than they did when interest rates were near zero. That’s what makes IBM an interesting stock at this point. It’s not a bet on spectacular AI growth. It’s a bet that a mature technology company can keep turning software, consulting, and AI demand into steady earnings and cash flow. At around 17 times forward earnings, that’s a bet that doesn’t look unreasonable.
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This article is originally published at Insider Monkey.
