To The Moon

$IBM(IBM)$

Earning Overview

In Q1, IBM reported sales of $14.54 billion, surpassing Wall Street expectations of $14.44 billion and slightly increasing from $14.46 billion in the same quarter last year. Earnings per share came in at $1.60—down from $1.68 a year ago, but well ahead of the $1.42 consensus estimate, marking a 12% beat. The company also delivered $2 billion in free cash flow, its highest Q1 result in several years.

IBM CEO Arvind Krishna highlighted the company's strong start to the year, crediting its strategic focus on hybrid cloud and AI for driving robust revenue growth, profitability, and cash flow.

Fundamental Analysis

On April 24, 2025, IBM shares declined by approximately 6.6%, marking it as the worst performer in the Dow Jones Industrial Average for the day. This drop occurred despite the company surpassing Wall Street expectations with adjusted earnings of $1.60 per share on $14.54 billion in revenue. The decline is attributed to underperformance in IBM’s software and hybrid cloud segments, particularly when evaluated on a constant currency basis—key areas expected to drive growth amid declining mainframe sales .​

Consulting and Infrastructure: These segments faced declines in Q4 2024, with consulting revenue down 2% and infrastructure revenue down 8%. ​

Federal Spending Cuts: IBM reported the cancellation of 15 U.S. government contracts, totaling approximately $100 million, due to cost-cutting measures by the Department of Government Efficiency (DOGE).

Guidance

Revenue Growth: IBM projects at least 5% revenue growth for 2025 on a constant currency basis. However, currency fluctuations are expected to pose a two-point headwind, potentially moderating reported growth. ​

Free Cash Flow: The company anticipates generating approximately $13.5 billion in free cash flow for the year, surpassing analyst expectations of $12.9 billion.

Return on Invested Capital (ROIC) Decline

IBM's ROIC has declined in recent years, currently sitting around 7.4%, which is relatively low compared to top-tier tech peers. This:

• Reflects capital inefficiency.

• Raises concerns about whether investments in AI and software will generate strong returns.

Free Cash Flow

IBM’s cash flow from operations has declined over the last decade, in line with the revenue drop. But in the trailing 12-month period, it still generated $13.5 billion in operating cash flow and $12.95 billion in free cash flow. For 2025, management is forecasting an uptick in free cash flow to $13.5 billion—a positive sign that the company’s transformation is translating into improved financial performance.

What’s more, the market responded favorably to the most recent earnings report. IBM reported earnings after the bell on January 29th, and the stock soared by over 13% the following day. That’s a massive move for a company of IBM’s size and speaks to how positively the market viewed the results and the company’s AI-driven strategy.

On the profitability side, return on invested capital (ROIC) has also declined over the years. IBM’s ROIC currently sits at 7.42%, reflecting the long-term transition away from higher-return legacy businesses. While that number may seem modest, it’s important to view it in the context of IBM’s evolving strategy. The company is still in the midst of this shift—and while legacy divestitures have dragged on returns, new growth areas like AI and software offer much stronger economics over time.

Risks and Challenges

Legacy Business Decline

IBM continues to be weighed down by its legacy businesses, particularly in infrastructure and consulting. These segments are experiencing ongoing revenue declines:

• In Q1 2025, the consulting and infrastructure business shrank by 7.6%.

• These declines offset gains in software and AI, limiting overall revenue growth.

• The company is in a race against time to grow its modern segments fast enough to outpace declines in the old ones.

Execution Risk in AI and Cloud

While IBM is betting heavily on AI and hybrid cloud, execution remains a risk:

• It faces intense competition from tech giants like Microsoft, Amazon (AWS), and Google in the cloud and AI infrastructure space.

• IBM's ability to differentiate its AI offering and maintain technical relevance is key to sustaining growth.

• Despite recent AI-driven revenue wins (e.g., $2B in generative AI in Q1 2025), the path to sustained long-term adoption is still being tested.

Profitability Pressures

While IBM beat EPS expectations in Q1 2025, profit margins are under pressure:

• Q1 EPS fell from $1.68 to $1.60 year-over-year.

• Legacy cost structures, large workforce overhead, and R&D expenses to fuel transformation initiatives may keep margin expansion muted.

Valuation

Now let’s move on to valuation. Based on my discounted cash flow (DCF) analysis, IBM’s intrinsic value comes out to around $399 per share, compared to the current market price of approximately $247. That’s a significant margin of safety and suggests the stock is trading well below its long-term fair value.

Of course, DCF models are sensitive to assumptions—especially around risk. So I ran a few alternate scenarios to test IBM’s valuation under different market risk profiles:

• At a beta of 0.71 (IBM’s current beta), the intrinsic value is $380.

• At a beta of 1.25 (reflecting a higher-risk environment), the value drops to $211, below the current price.

• At a beta of 1.0 (neutral risk), the fair value is about $275, still above the current market price.

So, in two out of three scenarios, IBM stock appears undervalued based on my DCF model.

Channel members can watch an exclusive deep dive video where I walk through the full DCF valuation with all the assumptions, inputs, and sensitivities. If you want access to that, consider becoming a member—you’ll also unlock dozens of other member-only videos.

Market sentiment

Analyst sentiment towards IBM is cautiously optimistic. The stock has a consensus rating of "Hold," with 11 buy ratings, 7 holds, and 3 sell ratings. The average price target stands at approximately $254.63, suggesting a modest upside from current levels .​

Strategic Positioning in AI and Software

IBM's strategic shift towards high-margin software and AI-driven services is gaining traction. The company reported a 7% increase in software sales, reaching $6.34 billion in Q1 2025. This growth is seen as a positive indicator of IBM's efforts to transform its business model and capitalize on emerging technologies .​

AI and Hybrid Cloud: IBM's focus on AI and hybrid cloud solutions continues to drive growth. The company's AI-related business has expanded to over $6 billion, marking a $1 billion increase from the previous quarter. Software Segment: The software division reported a 7% year-over-year revenue increase, reaching $6.34 billion in Q1 2025, underscoring the success of IBM's pivot towards high-margin software offerings.

Options Market Sentiment

In the options market, IBM is trading near the top of its 52-week range and above its 200-day simple moving average, indicating positive price momentum . However, significant options trades have been detected within the strike price corridor from $240.0 to $270.0 over the last 30 days, suggesting that traders are positioning for potential volatility .​

IBM's market sentiment reflects a balance between its strategic advancements in AI and software and the challenges posed by macroeconomic uncertainties and segment-specific headwinds. While the recent stock dip highlights investor concerns, the company's strong fundamentals and strategic positioning suggest potential for long-term growth.

Conclusion

IBM is a legacy tech titan undergoing a quiet but powerful transformation. It’s moving away from declining legacy infrastructure businesses and toward software, AI, and hybrid cloud solutions. These are all high-growth, high-margin areas with secular tailwinds.

Financially, the company is stabilizing, with rising free cash flow and growing earnings from AI and software. It’s also benefiting from a durable competitive edge: trust. That trust allows IBM to win business in situations where newer, unproven companies might struggle to get in the door.

According to my valuation models, IBM looks undervalued. According to its forward earnings, it looks fairly valued. Either way, I believe the risk-reward setup here is favorable.

I’ve rated IBM as a Hold today, any additional upside from this point will likely hinge on a continued trend of upward earnings estimate revisions in the coming weeks, as analysts absorb IBM’s optimistic outlook—even as tariff concerns weigh on the broader market.

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.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub