Is IBM Still a Smart Pick After AI-Powered Growth Surges in 2025?

If you are thinking about what to do with International Business Machines stock, you are definitely not alone. IBM has found its way back into the spotlight after a remarkable run over the past year, climbing 26.9% in total return. Even if you only started following the stock this year, you have seen a strong 10% return year to date. This easily outpaces plenty of household names in tech. It is not just a sudden spike either. IBM’s three- and five-year total returns both come in above 100%, indicating that this is not a one-hit wonder but a steady compounder that has delivered for patient investors. Naturally, investors want to know whether the rally can continue or whether IBM is looking expensive after such a strong performance. Recent market developments have helped fuel optimism for mature tech names like IBM, including increasing demand for AI services and cloud infrastructure. These trends have sparked a shift in risk perception and renewed growth expectations. Even so, not every analyst is convinced just yet. This helps explain why the stock still trades about 16% below the average analyst price target. So, where does IBM fit in the valuation puzzle? Using our six-factor analysis, the company scores a 2 out of 6 on our value score. This indicates it is undervalued in two areas while falling a bit short in others. In the next section, we will break down what is driving this valuation and take a closer look at the traditional approaches investors often use. If you stick around, we will highlight an even better way to make sense of where IBM stands now. International Business Machines delivered 26.9% returns over the last year. See how this stacks up to the rest of the IT industry.

Approach 1: International Business Machines Cash Flows

A Discounted Cash Flow (DCF) model helps estimate a company's true worth by projecting its future cash flows and then discounting them back to today's value. This process takes into account the present value of those future dollars, allowing investors to assess how much those dollars are really worth today. This approach gives investors an objective look at whether a stock is currently cheap or expensive based on underlying business performance.

For International Business Machines, the most recent data shows Free Cash Flow at $11.5 billion, with projections indicating steady growth based on analyst and estimate input. By 2035, annual Free Cash Flow is expected to reach $22.6 billion. These figures suggest a healthy pace of expansion over the next decade.

Based on the DCF calculation, IBM’s intrinsic value is estimated at $273.48 per share. This is 11.5 percent higher than its recent market price, indicating the stock is 11.5 percent undervalued compared to what the cash flow projections imply it should be worth today.

Result: UNDERVALUED

Our DCF analysis suggests International Business Machines is undervalued by 11.5%. Track this in your watchlist or portfolio, or discover more undervalued stocks based on DCF analysis.

Approach 2: International Business Machines Price vs Earnings

The Price-to-Earnings (PE) ratio is a commonly used metric for valuing profitable companies like International Business Machines. It helps investors gauge how much the market is willing to pay today for a dollar of IBM’s earnings. This metric is particularly helpful when a company has a consistent record of generating profits. The PE ratio provides insight into market expectations by weighing earnings growth potential against the risks and uncertainties the business may face.

Typically, higher growth prospects, stronger profit margins, and lower perceived risks result in higher "normal" PE ratios. Companies experiencing slower growth or facing more business uncertainties tend to trade at lower multiples. For IBM, the current PE ratio is 38.5x, which is higher than both the industry average of 30.8x and the peer average of 16.9x. This indicates that the market has a relatively high level of confidence in IBM’s earnings outlook compared to its competitors.

For a more tailored evaluation, Simply Wall St’s proprietary "Fair Ratio" incorporates factors such as IBM’s industry, profitability, and growth. IBM’s Fair PE Ratio is calculated at 42.6x. When compared to the actual PE ratio of 38.5x, the difference is small. This suggests that IBM’s share price is currently about in line with what would be expected for a company of its caliber given current conditions.

Result: ABOUT RIGHT

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your International Business Machines Narrative

A Narrative is your personal story about a company, linking your expectations about its future with the numbers, such as what you believe fair value and growth will be, and how much profit the company will make in years to come. Rather than looking at numbers in isolation, Narratives connect a company’s story, your assumptions, and a dynamic financial forecast all the way to a fair value that’s updated whenever new information emerges.

With Simply Wall St, Narratives offer an accessible, intuitive way for millions of investors to express their own perspective, test how it compares to others, and quickly see where their view differs from the market’s. By comparing the Fair Value (generated from your Narrative) to the current Price, you can see at a glance whether it might be time to buy, sell, or hold.

Best of all, Narratives are always evolving. If IBM announces a big AI win or faces a sudden challenge, every Fair Value and forecast can adjust in real time.

For example, some investors may see IBM’s fair value as high as $350 if bullish forecasts for AI, hybrid cloud, and margins play out, while others use a more cautious Narrative and land at $198. Your own view and conclusion is what truly matters.

For International Business Machines, we’ll make it really easy for you with previews of two leading International Business Machines Narratives: 🐂 International Business Machines Bull Case Fair Value: $281.77 Current Price vs Fair Value: 14.1% undervalued Revenue Growth (analyst expectation): 5.1%

• IBM's focus on hybrid cloud, AI, and strategic acquisitions is expected to drive steady revenue growth and expand margins, especially as clients modernize their IT infrastructure.
• Ongoing investments in generative AI, advanced mainframes, and software integration through acquisitions like HashiCorp aim to differentiate IBM and boost recurring high-value revenue streams.
• Macroeconomic uncertainties and currency fluctuations remain risks, but disciplined cost management and diversification in IBM's business model are designed to protect margins and cash flow resilience.

🐻 International Business Machines Bear Case Fair Value: $198.00 Current Price vs Fair Value: 22.3% overvalued Revenue Growth (bearish analyst expectation): 4.5%

• Intense competition from major cloud providers and rapid adoption of cloud-native solutions are likely to erode IBM's legacy business, limiting sustainable revenue and margin growth.
• Rising operational costs, debt, and compliance requirements could constrain IBM's ability to invest organically, potentially weakening its long-term financial strength and flexibility.
• Even with investments in AI and automation, skepticism remains that new initiatives can fully offset declining profits from IBM's traditional revenue streams, putting pressure on both earnings and free cash flow.

Do you think there's more to the story for International Business Machines? Create your own Narrative to let the Community know!

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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