IBM Shares Pop on Strong AI Growth. Is It Too Late to Buy the Stock?

Shares of IBM (NYSE: IBM) climbed after the company reported stronger-than-expected results for the fourth quarter and issued upbeat guidance. The stock is up about 35% over the past year, as of this writing.

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AI driving growth

IBM's growth is being driven by artificial intelligence (AI). Customers are now using its mainframes to help run AI inference, while its watsonx software platform is being used for AI governance and Red Hat OpenShift is being deployed to run AI in multicloud environments. Meanwhile, customers are turning to the company for consulting to help them move AI programs from pilots into production.

This helped IBM grow its revenue by 12%, or 9% in constant currencies, in the fourth quarter to $19.69 billion, topping the $19.23 billion consensus, as compiled by LSEG. Adjusted earnings per share (EPS), meanwhile, rose 15% to $4.52, besting analyst estimates of $4.32.

Infrastructure revenue led the way, with revenue growth of 21% to $5.1 billion. The company said its Z17 platform is now processing 50% more inference operations each day than its older Z16 platform. However, IBM is expecting infrastructure revenue to decline slightly this year as it laps the initial Z17 launch.

Software revenue, meanwhile, climbed 14% to $9 billion, and consulting revenue rose 3% to $5.3 billion. It expects software revenue to increase by 10% this year, with Red Hat OpenShift growth of around 30%. Consulting revenue, meanwhile, is predicted to accelerate to low- to mid-single-digit revenue growth in 2026.

IBM continues to be a cash-flow machine, generating free cash flow of $14.7 billion. It expects that number to go up by about another $1 billion in 2026. It has been using its strong free cash flow to make acquisitions in the software space.

It is currently integrating HashiCorp and expects to close its acquisition of Confluent later this year. HashiCorp gives IBM infrastructure automation and security technology, while Confluent can extract data across platforms in real time. This could help become the foundation of IBM's agentic AI platform while also improving and uniting its hybrid cloud and automation solutions.

While still in its early stages, IBM also continues to make progress on the quantum computing front. It introduced its 120-qubit Nighthawk system in December, and said it remains on track to introduce a fault-tolerant quantum computer by 2029.

The company projected its 2026 revenue to climb more than 5% in constant currencies, which was slightly above analyst expectations.

Is IBM stock a buy?

Trading at a forward price-to-earnings (P/E) of around 25 times 2026 analyst estimates, IBM is reasonably valued. The company is benefiting from AI and a leader in quantum computing, and the stock looks like a solid investment at current levels.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines. The Motley Fool recommends London Stock Exchange Group Plc. The Motley Fool has a disclosure policy.