IBM (IBM): Evaluating Valuation After Software Revenue Miss and AI Progress in Latest Quarterly Report

International Business Machines (IBM) has found itself in the spotlight after its most recent quarterly report, which came in below expectations on the software revenue front. Management pointed to growth tied to AI initiatives, but the market reaction was swifter than usual and sent shares downward as investors mulled over what the numbers really mean. The miss reignited long-standing concerns about IBM’s ability to keep up with rivals in fast-evolving sectors such as cloud computing and AI hardware, and left many shareholders wondering if IBM’s turnaround story needs more time.

This is not the first time IBM has encountered a pullback even after posting annual revenue and net income growth, but the recent 15% dip stands out. While shares are still up 26% over the past year and have more than doubled over three years, momentum has clearly shifted with prices fading over the past three months. Tech peers moving decisively in AI and cloud have kept pressure on IBM to prove its relevance, yet its leadership in quantum computing and a long dividend history leave the door open for a bullish case.

With sentiment fragile and the stock trading at a discount to some measures of intrinsic value, the key question is whether IBM is genuinely undervalued or if the market is rightly cautious about its growth prospects from here.

Most Popular Narrative: 14.1% Undervalued

According to community narrative, International Business Machines is seen as undervalued based on its future earnings growth and anticipated margin expansion. The fair value reflects not just present numbers, but also aggressive assumptions about how IBM’s strategic bets might deliver results in the years ahead.

IBM's focused strategy on hybrid cloud and AI is driving solid revenue growth by providing cost savings, productivity gains, and scalability for clients. This is expected to continue supporting their revenue trajectory. The launch of the z17 mainframe with enhanced AI acceleration and improved energy efficiency is anticipated to drive significant customer adoption, which could positively impact infrastructure revenue and potentially net margins due to differentiation and pricing power.

Interested in what is fueling this bold valuation perspective? The narrative centers on a technology shift with both high risk and high potential reward, where future growth and increased margins are the main factors. Want to know which financial forecasts and operational changes influence this target price? Explore the assumptions that could redefine IBM’s valuation outlook.

Result: Fair Value of $281.77 (UNDERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, unpredictable macroeconomic trends or sharper competition in AI services could quickly undermine analyst optimism and challenge IBM’s path to future growth.

Find out about the key risks to this International Business Machines narrative.

Another View: Comparing Valuation Approaches

Looking from a different angle, IBM appears expensive compared to the average company in its industry when using a price-to-earnings approach. This raises a new question: does the recent optimism overlook something crucial?

See what the numbers say about this price — find out in our valuation breakdown.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out International Business Machines for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own International Business Machines Narrative

If you see things differently or want to dig into the data yourself, you can build and customize your own story in just a few minutes. Go ahead and do it your way.

A great starting point for your International Business Machines research is our analysis highlighting 2 key rewards and 4 important warning signs that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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