IBM's Software Segment Growth Picks Up: A Sign of More Upside?

International Business Machines Corporation’s IBM Software segment is increasingly gaining traction with an increasing demand for a focused portfolio that provides end-to-end hybrid cloud and AI capabilities. The segment revenues in the first quarter of 2025 increased to $6.34 billion from $5.9 billion a year ago, driven by growth in Hybrid Platform & Solutions, Red Hat, Automation, Data & AI and Transaction Processing, backed by a strong focus on product innovation.

The buyout of California-based software company HashiCorp Inc. for an enterprise value of $6.4 billion has brought powerful synergies across key strategic growth areas of IBM, such as Red Hat, watsonx and IT Automation solutions. HashiCorp’s tools, Terraform and Vault, have been integrated with IBM’s Red Hat platforms to enhance cloud infrastructure management and hybrid cloud security, including for IBM Z. The addition of the new cutting-edge products has significantly improved IBM Software’s ability to help organizations optimize IT spending, reduce cloud costs and boost overall efficiency through automation. 

With a surge in traditional cloud-native workloads and associated applications, along with a rise in generative AI deployment, there is a radical expansion in the number of cloud workloads that enterprises are currently managing. This has resulted in heterogeneous, dynamic and complex infrastructure strategies, which, in turn, have led firms to undertake a cloud-agnostic and interoperable approach to highly secure multi-cloud management. Our revenue estimate for the segment is pegged at $7.52 billion, indicating year-over-year growth of 11.6% at constant currency. Much of this growth is expected to come from Hybrid Cloud businesses (up 23% to $1.9 billion) and Automation (up 15.4% to $1.87 billion).

Other Blue-Chip Tech Firms Focusing on Hybrid Cloud

Microsoft Corporation MSFT has doubled down on the cloud computing opportunity. Azure’s increased availability in more than 60 announced regions globally has strengthened Microsoft's competitive position in the cloud computing market. Operating through a vast network of global data centers that ensure high availability and reliability for applications, Azure offers seamless access to all the services included in the portal once customers subscribe to it. Subscribers can use these services to create cloud-based resources, such as virtual machines and databases, which can then be assembled into running environments used to host workloads and store data.

Amazon.com, Inc. AMZN enjoys a dominant position in the cloud-computing market, particularly in the IaaS space, thanks to Amazon Web Services (AWS), which is one of its high-margin-generating businesses. AWS is the world’s most comprehensive and broadly adopted on-demand cloud computing platform, offering more than 200 fully featured services from data centers globally. Millions of customers, including the fastest-growing startups, largest enterprises and leading government agencies, are using AWS to lower costs, become more agile and innovate faster. It reportedly offers the widest variety of databases that are purpose-built for different types of applications to enable subscribers to choose the right tool for the job.

IBM’s Price Performance, Valuation and Estimates

IBM has surged 60.7% over the past year compared with no change for the industry.

From a valuation standpoint, IBM trades at a forward price-to-sales ratio of 3.74, above the industry.

The Zacks Consensus Estimate for IBM’s earnings for 2025 has been on the rise over the past 30 days.
 

IBM currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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