I Think IBM Stock Will Be Higher in 5 Years. I Still Wouldn't Buy It Today.

Shareholders of International Business Machines (NYSE:IBM) have had a difficult 2026. The stock is down about 22% year to date as of this writing, trading near $230 -- roughly 30% below the record close of $329.23 it set on June 2.

Most of that damage arrived in a single session. Shares fell about 25% on July 14, when IBM reported preliminary second-quarter results that fell short of the company's own expectations. The lowered full-year outlook came on July 22, with the final report.

A sell-off like this invites a longer view, though. Where could IBM stock be five years from now?

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Growth slowed, and guidance followed

What made July especially painful was how strong the year had looked. IBM increased revenue 8% in 2025, to $67.5 billion. Free cash flow of $14.7 billion was up $2 billion from the previous year.

The momentum carried into 2026. First-quarter revenue rose 9% year over year, and software revenue jumped 11%.

Then the second quarter broke the pattern. Revenue of $17.2 billion was up just 1% year over year. Software revenue growth slowed to 5%, under half the first quarter's pace. Consulting revenue was flat. And infrastructure revenue fell 7%, with IBM Z, the mainframe business, down 42% as the z17 launch cycle wound down.

Management now expects revenue to increase 4% to 5% this year in constant currency, down from the more than 5% it still expected in April.

In a July 14 letter to investors, CEO Arvind Krishna pointed to clients moving spending toward servers, storage, and memory ahead of expected price increases, and to large deals that did not close on time.

"These conditions require our teams to execute perfectly, and this quarter we faltered," he said.

However you assess those explanations, the slowdown that concerns me is software's. It's the segment that underpins IBM's growth case. Mainframe cycles come and go. But a software slowdown is more difficult to dismiss.

Cash flow and the dividend

For all the top-line problems, IBM's cash generation has held up. Management still expects free cash flow to grow by about $1 billion in 2026, which would put the full-year total near $15.7 billion.

That cash supports one of the longest dividend growth records in technology. April's increase, to $1.69 per share quarterly, was IBM's 31st in a row, and the company has paid quarterly dividends since 1916. At the current share price, the stock yields just under 3%.

That said, the raises have become small. April's increase was a single penny. The streak looks secure, but shareholders should not count on the payout itself growing rapidly.

I think the stock ends up higher

If IBM adds about $1 billion of free cash flow a year (the increase management still expects for 2026), that works out to roughly 6% annual growth. A stock that simply tracks that cash flow higher from about $230 today would trade near $310 in five years, with the dividend adding almost another 3% annually.

That's a respectable result, in the neighborhood of what the broad market has historically returned. And it does not require software to reaccelerate -- just for IBM to keep producing the cash it already forecasts.

Quantum is the most difficult driver to put a number on. IBM's roadmap targets Starling, a large-scale fault-tolerant quantum computer, for 2029, inside this five-year window. And the investment is increasing: On Wednesday, Anderon, an IBM company, finalized a $1 billion CHIPS Act award, matched by another $1 billion from IBM itself, to accelerate research at its quantum wafer foundry in Albany, New York. Quantum could arguably become a material business by 2031. Of course, I would not pay for that today.

The swing factor, again, is software. If the segment returns to the double-digit growth it recorded in the first quarter, the market could pay more than the stock's current valuation of about 18 times 2027's expected earnings. At the June record, the price worked out to about 25 times the same earnings estimates.

If instead the second quarter's pace is the new normal, the stock may not go anywhere over five years. After all, July showed what the market believes 1% growth is worth.

Ultimately, my best guess is a stock somewhere in the low $300s five years from now, with cash flow and the dividend doing most of the work. That path would take shares most of the way back to their June record.

Is that path worth buying into today? I don't think so, at least not yet. The one thing that would make the stock compelling -- software growth turning back up -- has not happened. I would hold off until it does.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines. The Motley Fool has a disclosure policy.