IBM Reports Oct. 21. Should You Buy the Stock 29% Below Its June Record?

Shares of International Business Machines (NYSE:IBM) trade around $234 as I write, two days before the company posts third-quarter results on Wednesday, Oct. 21. The stock has shed about 21% of its value so far in 2026, and it is 29% below the all-time high of $329.23 it closed at on June 2.

The hardest hit was on July 14, when IBM said second-quarter revenue had come in below its own expectations. Shares sank 25% that day.

What bothers me most about that quarter is software. IBM's software revenue grew 5% year over year. But without acquisitions, it was flat, according to CFO James Kavanaugh.

With the stock this far below its high and a dividend yielding almost 3%, is IBM worth buying before Wednesday's report?

Image source: The Motley Fool.

Software growth slowed sharply

Software is IBM's biggest segment by both revenue and profit. It pulled in $7.8 billion in second-quarter sales, and its segment profit climbed 9% year over year to $2.5 billion. But its revenue growth has slowed for two straight quarters. The segment's revenue grew 14% year over year in the fourth quarter of 2025. Growth then eased to 11% in the first quarter of 2026, and the second quarter brought just 5%. And acquisitions, such as data-streaming firm Confluent, which IBM bought in March, provided all of that latest 5%.

Management blamed timing. In the last weeks of June, many customers moved budgets to hardware to lock in supply before expected price rises. And "tens of large deals failed to close on the timelines we expected," Kavanaugh said on IBM's July 22 call with analysts.

This hurt transaction processing, the software linked mainly to IBM's mainframes, which slid 8%.

Of course, there were bright spots. Red Hat, IBM's hybrid cloud business, grew 11%, and data software grew 19%. And CEO Arvind Krishna said around a third of the delayed deals closed in the first three weeks of the third quarter.

But a quarter with no organic software growth is hard to shrug off. Software is arguably the part of IBM that its growth story relies on most.

The report needs software to pick back up

IBM now expects software revenue growth of 6% to 8% this year in constant currency. Kavanaugh called the low end an anchor that assumes recent spending patterns hold through the second half. The high end, he said, means "a second half that's approaching double digits."

Around 80% of IBM's software sales are recurring subscription and consumption-based revenue, like Red Hat. Kavanaugh said that recurring revenue rose 7% in the first quarter and accelerated to 8% in the second, and IBM's high-end case has it hitting about 10% in the second half.

For IBM overall, management expects third-quarter revenue growth, in constant currency, in line with its full-year range of 4% to 5%. That would be a clear step up from 1% growth in the second quarter.

So the number I'll watch on Wednesday is software growth. A climb from 5% toward the high single digits might signal the delayed deals are coming back. It'd also come against a tough comparison -- software rose 9% on a constant-currency basis in the year-ago quarter. Another quarter around 5%, driven by acquisitions, might point to the low end instead.

Is the dividend reason enough to buy now?

The stock already prices in plenty of disappointment. At around $234, it trades at about 18 times IBM's expected 2027 earnings. At June's high, it fetched about 25 times those same earnings estimates.

Meanwhile, IBM pays $1.69 a share a quarter ($6.76 a year). At the stock's current price, the dividend yields around 2.9%. April's hike was IBM's 31st yearly raise in a row, though only by a cent.

The payout looks well covered, too. IBM produced $14.7 billion in free cash flow in 2025 and still expects the number to climb by around $1 billion this year, while its dividends cost about $1.6 billion a quarter.

But a yield just below 3% is modest pay for waiting on a software recovery that hasn't turned up in the results yet. Until organic growth returns, 18 times earnings might simply be a fair price for a slower business.

If Wednesday's report shows software growth climbing toward the high single digits, with recurring revenue rising toward 10%, I think IBM stock could be worth considering at this price, with the dividend paying around 3% a year as the rest of the recovery plays out. If the quarter looks like the second, I'd keep waiting.

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.