IBM cloud growth slows, but AI-powered mainframe drives Q3 results

• IBM’s cloud business, led by its Red Hat hybrid cloud unit, saw sales growth slow to 14% in the third quarter, down from 16% in the previous period.

IBM reported mixed third-quarter results, with slowing cloud software growth raising caution among investors—even as surging demand for the company’s new AI-optimised mainframe systems helped push sales and profits above Wall Street estimates.

Shares of the technology giant fell 5 per cent in after-hours trading, reflecting investor concern over decelerating momentum in IBM’s cloud business, which is a linchpin of its long-term growth strategy as enterprise customers adopt more AI-driven solutions.

Cloud momentum cools

IBM’s cloud business, led by its Red Hat hybrid cloud unit, saw sales growth slow to 14 per cent in the third quarter, down from 16 per cent in the previous period.

While this segment was expected to be a primary beneficiary of rising AI adoption and the broader shift to cloud services, the moderation in growth overshadowed the company’s better-than-expected revenue of $16.33 billion, which surpassed analysts’ consensus forecast of $16.09 billion.

Chief Executive Arvind Krishna sought to reassure investors, stating during the company’s post-earnings call that Red Hat’s growth is expected to return to “mid-teen percentage levels”—or close to it—by 2026.

Despite a roughly 30 per cent rally in IBM shares so far this year, the stock’s premium valuation has made expectations particularly sensitive. The company trades at a forward price-to-earnings multiple of nearly 24, notably higher than the roughly 18 times forward earnings for key rival Accenture.

AI mainframe business surges

Offsetting these cloud concerns, IBM’s infrastructure segment—which includes its new mainframe systems—posted revenue growth of 17 per cent to $3.56 billion. The mainframe, built with chips tailored for AI applications, has seen particularly strong adoption in the financial services sector, which values the platform’s ability to maintain strict data residency and encryption standards while enabling AI development, according to Chief Financial Officer Jim Kavanaugh.

IBM’s AI-related business activities grew to $9.5 billion, up by $2 billion in just one quarter—further underscoring robust customer interest in generative AI and legacy modernisation.

Looking ahead, IBM raised its full-year outlook, forecasting revenue growth to exceed 5 per cent at constant currency. This is a slight increase from the company’s earlier projection of at least 5 per cent growth, reflecting confidence in strong AI-driven demand even as software growth faces headwinds.