IBM Cash Flow Surges Amid Revenue Slowdown

IBM's free cash flow has grown rather than shrunk over the past three years, making it appear to be an underpriced business. The company generated $14.9 billion in cash from its operations over the last twelve months, with about 19% of its revenue ending up as free cash. This is higher than the median S&P 500 company's 4.5% yield on market value.

However, IBM's net debt stands at $54.8 billion, which reduces its overall cash yield to 5.0%. The company can still afford to serve its debt, earning 6.4 times its interest bill in operating profit. Despite this, the larger doubt about its cash comes from its second quarter performance.

In the second quarter of fiscal 2026, tens of large deals failed to close on time, causing revenue growth to slow to just 1%. Management attributed most of the shortfall to these missed deals, as well as clients diverting capital away from software deals toward hardware purchases. IBM's mainframe revenue fell by a significant 42% in the quarter.

The company has forecasted that free cash flow will grow by about $1 billion in 2026, but this is uncertain until the rest of the delayed contracts are finalized. If the slipped deals turn out to be lost rather than delayed, the case for buying IBM's stock would weaken. The third-quarter report will provide further insight into whether free cash flow is on track to meet its forecast.