IBM falls due to legacy business. Meanwhile, software grows double-digit.
The Software segment last year generated the highest year-over-year growth in IBM's history and now accounts for 44% of the company's revenue. The stock has nevertheless lost over 25% from its April peak this year after the second quarter of 2026 revealed how quickly the mainframe cycle and AI demand can slow.
Key points
The Software segment grew by 10.6% in 2025 and accounts for 44% of IBM's revenue, but in the second quarter of 2026 its growth slowed to 5%.
Generative AI is behind a backlog exceeding $12.5 billion, but roughly 80% of it consists of consulting contracts, not direct software sales.
The Infrastructure segment grew by 12.1% last year thanks to the new z17 mainframe generation, but in the second quarter of 2026 it fell by 7% as Z systems sales dropped by 42%.
The acquisitions of HashiCorp ($6.4 billion) and Confluent ($11 billion) increased gross debt to $62 billion, but free cash flow still comfortably covers the dividend and share buybacks.
The stock has fallen by more than 25% since its June peak, and a forward P/E of around 19 to 20 times earnings is below Microsoft's level, but above Accenture and HPE.
This summer, IBM $IBM lost billions of dollars in market value in a single afternoon. The second quarter of 2026 brought revenue only slightly above the previous year's level, a 7% drop in the Infrastructure segment, and a cut in the full-year outlook from "more than 5%" to "4 to 5%" constant-currency revenue growth. The market reacted with a double-digit percentage drop in the share price from its April and June highs.
Such a drop invites a simple conclusion that the old technology company continues to lose ground. However, the share price decline alone does not explain why the Software segment accelerated to its highest year-over-year pace in its history in the same year, and why generative AI recorded a backlog of over $12.5 billion. The share price reflects market sentiment over the last quarter. The value of the company's individual parts will only be revealed by a segment breakdown.
IBM today is not one company with one economy, but a set of three segments with very different dynamics. The older infrastructure and mainframe part is subject to refresh cycles that create a revenue jump every few years, followed by a slowdown. The newer software and cloud part grows more steadily and with higher margin. The key question is whether IBM's current valuation corresponds to the sum of these parts' values, or whether the market still prices the company according to the old formula of a single, slow-growing technology corporation.
What does the company actually do today?
IBM reports four segments: Software, Consulting, Infrastructure, and a smaller Financing segment. For the full year 2025, the company generated total revenue of $67.5 billion, up 7.6% compared to 2024. A segment breakdown shows which segment actually created this growth.
Segment | FY2025 Revenue | Year-over-Year Growth | Segment Margin | Trend |
|---|---|---|---|---|
Software | $30.0 billion | +10.6% | 33.1% | Accelerating, slowed to +5% in Q2 2026 |
Consulting | $21.1 billion | +1.8% | 11.7% | Stagnant, low book-to-bill |
Infrastructure | $15.7 billion | +12.1% | 22.0% | Cyclical, driven by the tail end of the z17 cycle |
Source: IBM, Q4 and full-year 2025 results
Software: the new profit center
Software is no longer an add-on but the main source of IBM's profit:
segment margin reaches 33.1%, roughly triple Consulting's margin,
the segment's share of IBM's total revenue has grown from a quarter in 2018 to today's 44%,
Red Hat OpenShift annual recurring revenue (ARR) reached $1.9 billion at the end of 2025, up over 30% year over year.
Within the segment, growth is driven mainly by Red Hat (Hybrid Cloud), Data, and Automation. This type of revenue is contractually committed and predictable, making it a qualitatively different economy than hardware sales.
Consulting: stabilization without pull
Consulting grew by only 1.8% in 2025 and was completely flat year over year in the second quarter of 2026:
segment margin is improving, from 8.1% in 2021 to 11.7% in 2025,
the book-to-bill ratio over the last twelve months is 1.05, just above the healthy threshold.
The low book-to-bill signals that the new order book is not growing faster than the work being delivered. Consulting is primarily a distribution channel for IBM: through consulting contracts, the company sells follow-on software and AI licenses, but the segment itself now contributes only minimally to overall growth.
Infrastructure: cyclical engine
Infrastructure is the most cyclical of the three segments:
it grew by 12.1% in 2025 thanks to the new z17 mainframe generation, whose sales jumped by 48%,
in the second quarter of 2026, on the other hand, Z systems revenue fell by 42%,
Distributed Infrastructure grew by a record 37% in the same quarter.
Such a jump and subsequent drop is typical for a product cycle: large clients buy new systems in a short window after launch, and then demand subsides for several years. Segment results therefore do not indicate structural decline, but rather the phase of the cycle the company is currently in.