To The Moon

$IBM(IBM)$

IBM just experienced its best trading day in 25 years, surging nearly 133% to $258 per share. Looking at the chart over the past year, this dramatic jump was driven by the company’s recently released Q4 2024 earnings.

In this analysis, we'll examine IBM’s financial performance, explore why the market responded so positively, and input these figures into my automated stock valuation spreadsheet. Using models like Discounted Free Cash Flow, Comparable Company Analysis, the Dividend Discount Model, and the B Grim Formula, we'll determine whether IBM is a buy or sell.

Earning Overview

Breaking down the earnings, IBM’s CEO highlighted double-digit revenue growth in the software segment, with further acceleration in Red Hat. The company’s AI-related business now exceeds $5 billion, reflecting a $2 billion increase quarter-over-quarter, which investors have responded favorably to.

Examining the numbers, software remains IBM’s largest segment, growing from $7.1 billion to nearly $8 billion for the quarter and from $25 billion to $27 billion for the full year. Other segments, including consulting and infrastructure, saw slight declines. However, total quarterly revenue rose from $17.3 billion to $17.5 billion, and full-year revenue increased from $61.8 billion to $62.7 billion.

Fundamental Analysis

Declining and Flat Growth and EPS

Despite the revenue growth, net income dipped slightly, from $3.2 billion to $2.9 billion for the quarter and from $7.5 billion to $6 billion for the year. Free cash flow for the year was estimated at $12.7 billion, with quarterly projections around $6.1 billion.

Next, we’ll input these figures into the automated stock valuation spreadsheet. While the latest earnings data isn't fully updated yet, we can manually adjust the numbers to get a more accurate valuation. By entering total quarterly revenue of $17.55 billion, the annual figure adjusts to $64 billion. Updating net income to $2.91 billion for the quarter brings the yearly total to $7.5 billion. Similarly, estimated free cash flow for the quarter at $6.1 billion suggests an annual projection of around $13 billion.

Guidance

Looking at IBM’s revenue trends, data going back to 2009 shows steady growth in recent years, particularly since the decline in 2019. The most recent figure stands at $64.36 billion, reflecting a positive upward trend.

Net income has also been increasing, with the trailing twelve months (TTM) figure nearing $7.5 billion. Free cash flow remains strong, currently at $13.2 billion, showcasing IBM’s consistent ability to generate cash. Operating cash flow has historically grown, while capital expenditures remain low, further supporting IBM’s solid cash generation.

At a market capitalization of $240 billion, IBM’s price-to-earnings (P/E) ratio stands at 37—higher than the market average. Earnings per share (EPS) is $6.90, and the stock's beta is 0.74. Analysts currently have a price target of $240, meaning IBM is trading slightly ahead of that.

Dividend

The company offers a dividend yield of 2.92%, paying out $7.54 per share annually. While the dividend appears relatively safe, the free cash flow payout ratio is 53%, whereas the net income payout ratio is higher at 93%. Investors looking to secure the next dividend payment should buy before February 10.

In terms of share buybacks, IBM had been repurchasing shares, but there has been a slight increase in outstanding shares recently. Over the past five years, the stock price has shown a steady upward trend.

Valuation

Moving to valuation, the discounted free cash flow (DCF) model suggests a very high intrinsic value, initially calculating $530 per share. Adjusting assumptions—such as setting revenue growth to 2.5% and net income margins to 10%—brings the fair value estimate down to $285 per share, which is much closer to the current price.

The dividend discount model (DDM) indicates that IBM is overvalued under its current dividend growth rate. If dividend growth were to increase to around 4% annually, the stock would be fairly valued.

Finally, the B Graham formula for intrinsic value, which tends to be conservative due to high bond yields, values IBM at just $78 per share. This suggests that, under Graham’s methodology, the stock is significantly overvalued.

Overall, different valuation methods yield varying results, with DCF showing potential upside while other models indicate IBM may be trading above intrinsic value.

Comparable Company Analysis

Finally, let’s take a look at the comparable company model, which values stocks by comparing them to similar companies in the same industry and of similar size. We’ll analyze IBM alongside Hewlett Packard Enterprise (HPE), Oracle—companies that operate in IT hardware, cloud solutions, enterprise software, and AI. Additionally, we’ll compare IBM with tech giants like Microsoft (MSFT) to get a broader perspective.

Industry Comparisons

In terms of enterprise value, IBM is smaller than Microsoft, , and Oracle but larger than HP. When looking at revenue, IBM has one of the highest figures, though growth has been somewhat flat. Over a four-year period, revenue has increased, but due to a spike in 2020, the five-year comparison shows a decline.

For net income and profit margins, IBM sits in the middle of the pack. Its price-to-sales ratio is slightly above the market average of 3.1, but lower than most of its peers except HP. On the price-to-book ratio, IBM is also in the middle range.

IBM reported its fourth-quarter 2024 financial results on January 29, 2025. The company achieved adjusted earnings per share of $3.92, surpassing analysts' expectations of $3.78. Revenue for the quarter was $17.55 billion, aligning with market forecasts. Notably, IBM's generative AI business experienced significant growth, increasing by nearly $2 billion from the previous quarter, bringing the total to over $5 billion since its inception. In terms of free cash flow (FCF), IBM has projected approximately $13.5 billion for the fiscal year 2025. This projection is a key component in conducting a Discounted Cash Flow (DCF) valuation, which estimates the present value of a company's expected future cash flows to determine its intrinsic value.

The DCF value of IBM's stock at $175.89 per share. Given the current market price of $223.26, this suggests the stock may be overvalued by approximately 21%

Comparing to Tech Giants

When IBM is stacked against Microsoft, Amazon, and Google, it’s clear that IBM is significantly smaller—about one-tenth the size of these companies in terms of enterprise value and revenue. Profit margins are also considerably lower, with Microsoft boasting a 36% margin compared to IBM’s more modest figures.

Conclusion

IBM's stock has risen due to AI-driven revenue growth, The (P/E) ratio is significantly higher than its historical average or industry peers, it might indicate overvaluation. IBM is traditionally seen as a dividend/value stock rather than a high-growth tech stock it is overvalued.

• Dividend Discount Model (DDM): Does not favor IBM.

• Ben Graham Formula: Suggests the stock is highly overvalued.

• Discounted Free Cash Flow (DCF): Indicates overvalue.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.