What Should IBM Stock Investors Be Watching Now?

If you own International Business Machines (IBM) stock, you may be asking whether the business has a lasting problem. A $10,000 holding from three months ago is worth about $7,850 today. On its July 22, 2026 call, management said the second quarter of fiscal 2026 fell short of expectations. What went wrong in that quarter?

IBM Says Clients Bought Hardware First

IBM’s clients put their money into hardware and did not sign the deals IBM expected. Management said many clients redirected spending toward servers, storage and memory. Those products were in short supply, and clients wanted to buy before prices rose.

Management said tens of large deals failed to close on time, and they made up most of the shortfall. Software revenue rose 5% in the quarter, but management said organic growth was flat. Organic growth is growth without the sales added by acquisitions.

The shortage was not new for IBM. Management said limited hardware availability had already affected RHEL, which is an enterprise-grade Linux operating system developed by Red Hat, in the prior quarter. IBM has now felt the hardware shortage for two quarters in a row.

How Much Of IBM’s Business Is Exposed?

The exposed business is software, IBM’s largest segment. Software brought in $30.0 billion in fiscal 2025, or 44% of IBM’s revenue that year. Management said the software shortfall was limited to the part of its portfolio whose sales depend on clients’ equipment budgets. We do not know how large that part is.

Software has also grown faster than IBM as a whole. Its revenue rose 10.6% in fiscal 2025, against 7.6% for the whole company. After the shortfall, management revised its 2026 forecast for software growth to 6% to 8%.

The stock price has already come down, but IBM has been valued lower than this before. IBM stock is 31% below its 52-week high. It trades at 19.8 times the past year’s earnings, a ratio called the P/E, against 21.4 for the S&P 500. IBM’s own P/E has been as low as 10.5 in the past ten years.

Are IBM’s Late Deals Delayed Or Lost?

Some were only delayed, and it is not yet known whether the rest are lost. Management was asked that question on the July 22 call. Management said about one-third of the late deals had already closed. It called that a good sign the deals were delayed, but said it was not yet full evidence.

Management has also allowed for the spending shift to last. It said the low end of its software forecast assumes clients keep spending this way through the second half. That makes this a real risk, and one that is not yet settled.

IBM’s record in past market shocks gives a rough guide to how far the stock can fall. In the 2025 tariff shock, IBM stock fell 16.0% from peak to trough, against 19.0% for the S&P 500. A fall of that size would take $1,600 off a holding worth $10,000 today. IBM fell less than the index that time, but not every time. In the 2023 regional banking crisis, IBM fell 11.0% and the index fell 6.7%.

By the July 22 call, IBM had already closed about a third of the late deals. The danger is that clients keep buying hardware first through the second half of 2026. IBM’s report for the third quarter of fiscal 2026 will be the next sign of whether that is happening. In that report, investors should be watching software growth. Third-quarter organic software growth clearly above the second quarter’s flat level would suggest the deals were only delayed. Organic growth that stays flat or turns lower would suggest clients still put hardware first.

Does This Mean You Should Act On IBM?

Our purpose is to inform you with unique data so you make the right investment decisions. That said, betting on a single stock is always risky, no matter which direction you choose.

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