International Business Machines (IBM)

Conclusion

International Business Machines sells hybrid cloud and AI software, consulting, infrastructure and client financing. At a price of 246.11 USD on 2026-11-09, its market capitalisation is 232.6 billion USD and its enterprise value is 288.7 billion USD.

The verdict is overvalued. The fair value band runs from 143.68 to 215.51 USD with a midpoint of 179.59 USD, and the margin of safety is -27.0% at the current price. The discounted cash flow gives 182.49 USD per share at a discount rate of 8.87%, and the fair value from historical multiples is 176.70 USD. Against their own ten-year medians, EV/EBITDA stands at 17.6 against 12.4, a premium of 41.9%, and the P/E at 20.8 against 20.0, a premium of 4.0%. The reverse DCF implies growth of 4.6% a year, while revenue has a five-year CAGR of -1.7% and free cash flow per share -5.5%.

Three numbers support the case: ROIC of 13.6% against a WACC of 8.0%, an operating margin of 16.8% against a ten-year median of 14.8%, and seven earnings beats in eight quarters. Three numbers weaken it: net debt to EBITDA of 3.42, a ten-year revenue CAGR of -1.9%, and the EV/EBITDA premium of 41.9%.

Financial health

Financial strength is yellow: the Altman Z-score of 3.26 is good, while net debt to EBITDA of 3.42, interest coverage of 6.45 and a current ratio of 0.85 are neutral. The quick ratio is 0.68 and debt to equity is 1.89, so the balance sheet relies on steady operating cash flow. The Altman Z-score falls in the safe zone, although that model was designed for manufacturers and IBM is mainly a software and services business. Insolvency risk is low, with a probability of about 0.9% by the estimate of the Ohlson model over one to two years, based on the 2025-12-31 statements.

Earnings quality

Earnings quality is yellow, with free cash flow conversion of 178.7% over five years and 128.4% on a trailing basis holding the assessment up. The accrual ratio is -0.018, a sign that reported earnings are backed by cash. Stock-based compensation is 2.8% of revenue, and free cash flow after it is 12.37 billion USD. The share count has risen at a 1.1% CAGR over five years, so there are no net buybacks. The Piotroski score is 6 out of 9, and the Beneish M-score is not available. The company beat estimates in seven of the last eight quarters, with an average surprise of 5.3%. Analysts raised current-year estimates in 16 revisions over the last 30 days and cut them in three.

Profitability

Profitability is green, with all four assessed metrics rated good. The gross margin is 58.0% against a ten-year median of 54.3%, the operating margin 16.8% against 14.8%, and the net margin 16.0% against 10.5%. ROIC is 13.6% against a WACC of 8.0%, and the ROIC minus WACC value is 5.6%, a clear sign of value creation. The five-year median ROIC is 10.6%. Return on equity is 31.4%, but the DuPont split shows that it rests on a net margin of 15.7%, an asset turnover of 0.44 and an equity multiplier of 4.65. Leverage therefore contributes much of the headline return on equity.

Growth

Growth is yellow. Revenue grew at a 3.7% CAGR over three years, but fell at -1.7% over five years and -1.9% over ten. Earnings per share grew at 83.8% over three years and 12.4% over five, but fell at -1.8% over ten years. Free cash flow per share rose 10.7% over three years, fell at -5.5% over five and was flat at -0.4% over ten. Revenue grew in six of the ten comparable years. Analysts expect next-year earnings per share to rise 6.6%, and the forward estimate is still moving upward.

Valuation

Valuation is red, as the verdict itself is negative. The price-to-earnings ratio of 20.8 is close to its ten-year median of 20.0, a premium of 4.0%. The EV/EBITDA of 17.6 sits 41.9% above its median of 12.4, the price-to-free-cash-flow of 16.2 is 39.3% above 11.6, and the price-to-sales of 3.3 is 61.9% above 2.1. The price-to-book of 6.5 is 5.0% below its median of 6.9. The discounted cash flow gives 182.49 USD per share at a discount rate of 8.87%, with a terminal growth rate of 2.5%; the terminal value accounts for 53.1% of that figure. The fair value from historical multiples is 176.70 USD. The reverse DCF implies growth of 4.6%, against a five-year revenue CAGR of -1.7%. The dividend yield is 2.7% and the forward yield 2.8%, and dividends absorb 44.2% of free cash flow. The fair value is an order-of-magnitude estimate built on fixed assumptions, not a price target.

Risks

The main weak number is net debt to EBITDA of 3.42. If EBITDA fell, leverage would rise and the company would have less room to fund dividends and investment from operations. Revenue has shrunk over ten years at -1.9% a year, so the growth implied by the price has to come from a change in trend. The valuation premium on EV/EBITDA of 41.9% leaves little margin if earnings disappoint. The Beneish M-score is not available, and the company does not report a debt maturity schedule or revenue by segment in these figures, which limits how far the debt and growth profile can be checked. The Altman model was built for manufacturers, so its safe zone is a rough guide for this business.