IBM Adds to Its Growth Prospects With Timely AI Investments

IBM has transformed into a high-margin hybrid cloud and AI. The software portfolio, which now represents over 40% of revenue, is growing 10% annually and driving a favourable shift in business mix toward higher-profit-margin recurring revenue.

In fact, the enterprise AI market represents a transformational growth opportunity uniquely suited to this firm’s competitive strengths. What’s more, strategic acquisitions like the pending $11 billion Confluent acquisition are removing critical gaps in the company’s technology stack and accelerating the company’s ability to deploy AI at enterprise scale.

Meanwhile, the stock trades at 24.6 times the company’s forward earnings forecast, a very fair valuation considering the company’s transformation trajectory and improving business quality.

INTERNATIONAL BUSINESS MACHINES CORP. (New York symbol IBM) is one of the world’s largest computer firms with operations in over 175 countries.

IBM has agreed to acquire Confluent Inc. (Nasdaq symbol CFLT) for $11 billion. That firm makes software that moves and processes data in real time across internal systems, cloud environments, and applications. These tools are particularly important to the performance of new artificial intelligence-powered computing services.

Confluent’s technology enhances IBM’s hybrid cloud systems, which integrate a firm’s own private cloud servers with the public cloud servers. Hybrid systems help its clients protect their sensitive data against cyberattacks, data thefts and ransom demands.

Meanwhile, IBM continues to invest heavily in R&D. The company’s research costs rose 11.0% in the latest quarter, to $2.08 billion (or 12.7% of revenue) from $1.88 billion (12.5% of revenue).
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That spending is helping IBM emerge as a leader in quantum computing.

Currently, IBM is working on larger clusters of quantum chips that it expects will enable large-scale quantum computing in the next five years. And as part of that effort, the company has announced a partnership with chip maker AMD (symbol AMD on Nasdaq) to “develop next-generation computing architectures” that will rely on a combination of quantum computers and high-performance conventional computing.

Called quantum-centric supercomputing, the idea is to fuse IBM’s background in developing quantum computers and related software with AMD’s experience in high-performance computing power and AI accelerators.

Notably, IBM has formed a new alliance with Anthropic, a San Francisco-based developer of artificial intelligence (AI) software.

The company will integrate Anthropic’s Claude AI tool into its own software packages. Claude helps software engineers automatically update older code and other tasks. It can also help business customers improve their own AI agents, programs that independently manage a variety of routine tasks.

This deal should help IBM attract more business clients to its mainframe computer and cloud computing products.

IBM’s strategic moves are pushing up sales and earnings

In the three months ended September 30, 2025, overall revenue rose 9.1%, to $16.33 billion from $15.00 billion a year earlier. That topped the consensus forecast of $16.09 billion. If you exclude exchange rates, revenue in the quarter rose 7%.

Cloud computing revenue (12% of the total) in the third quarter rose 14% to $1.9 billion. However, that’s down from a 16% rise in the second quarter.

Earnings before unusual items also gained 16.8%, to $2.52 billion from $2.16 billion. Due to more shares outstanding, per-share earnings rose 15.2%, to $2.65 from $2.30. That beat the consensus estimate of $2.45.

IBM is now forecast to make $12.40 a share in 2026, and the stock trades at a reasonable 24.6 times that estimate.

With the June 2025 payment, IBM raised your quarterly dividend by 0.6%, to $1.68 a share from $1.67. The new annual rate of $6.72 yields a solid 2.2%. The company has paid regular dividends since 1916 and has increased the annual rate each year for the past 30 years.

Including this latest increase, the company’s dividend has grown an average 0.6% annually over the last 5 years. Its TSI Dividend Sustainability Rating is Above Average.

Recommendation in Canadian Wealth Advisor: IBM Corp. is a buy.

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Scott Clayton

Scott is an associate editor at TSI Network. He is the lead reporter and analyst for Dividend Advisor, Power Growth Investor and Canadian Wealth Advisor and a member of the Investment Planning Committee. Scott began his investment and financial career working with Pat McKeough at The Investment Reporter in the 1980s. Subsequently, he worked at the Financial Post Corporation Service for 10 years. He joined TSI Network in 1998. He is a Bachelor of Economics graduate of York University, and he also has an M.B.A. from the Schulich School of Business.

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