Is It Too Late to Consider IBM After a 40% Rally in 2025?

If you are contemplating what to do with International Business Machines stock right now, you are hardly alone. The company’s shares have delivered impressive returns recently, surging 9.3% just in the last week, 14.9% over the past month, and almost 40% since the start of the year. For anyone eyeballing those numbers on their portfolio screen, it raises the obvious question: is IBM still a buy, or has this rally already factored in all the good news?

Going further back, IBM’s stock has handed investors a staggering 149.2% return over three years and over 250% if you zoom out to five years. This remarkable upward momentum has put the company in the spotlight, particularly following recent headlines about IBM’s expansion into cloud computing and growing interest in its AI-driven services. These moves have been widely seen as a strategic pivot, helping to shift market perceptions of IBM from an aging tech behemoth to a player with credible growth prospects. This shift might help explain some of the renewed investor enthusiasm and even a willingness to pay up for the stock.

Despite all this, looking at IBM’s current valuation paints a more cautious picture. According to a widely used scoring system, the company’s value score comes in at just 1 out of 6, meaning it is only considered undervalued in one major respect. That raises an important discussion: how much room is left for growth, and is the market’s optimism justified at these levels?

In the following sections, we will examine the different valuation methods analysts use to judge if a stock like IBM is a bargain or possibly overpriced. At the end, we will explore a fresh perspective on valuation that might give you even more confidence in your next move.

International Business Machines scores just 1/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: International Business Machines Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model is a popular valuation method that estimates the value of a company by projecting its future cash flows and discounting them back to their current value. This approach focuses on how much cash International Business Machines is expected to generate in the future, using those estimates to calculate what the company is worth today.

For International Business Machines, analysts estimate the latest twelve months’ free cash flow at $11.7 Billion. According to available projections, IBM’s free cash flow is expected to rise steadily, reaching $23.2 Billion by 2035, with more near-term projections (through 2028) also showing robust growth. The first five years of these estimates are provided by analysts, while years beyond are extrapolated based on industry trends and historical performance.

Based on this method, IBM’s fair value is estimated at $280 per share. However, comparing this intrinsic value to the current share price suggests the stock is roughly 9.8% overvalued. This means the recent rally may have pushed its valuation just above its fundamental worth.

Result: ABOUT RIGHT

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for International Business Machines.

Simply Wall St performs a valuation analysis on every stock in the world every day (check out International Business Machines's valuation analysis). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes.

Approach 2: International Business Machines Price vs Earnings (PE Ratio)

For established, profitable companies like International Business Machines, the Price-to-Earnings (PE) ratio is one of the most widely used valuation metrics. The PE ratio tells investors how much they are paying for each dollar of a company’s earnings, making it especially useful when profits are steady and predictable. Growth expectations and company-specific risks play a big part in determining what a “normal” or “fair” PE ratio should be. Essentially, investors are willing to pay a higher PE for companies with faster growth prospects and lower perceived risk, while slower growth or higher risk warrants a lower multiple.

Currently, IBM trades at a PE ratio of 36.3x. This compares to an industry average PE of 30.7x and a peer average of 20.4x. At first glance, this suggests the stock is commanding a premium versus both its industry and peer group. This may reflect optimism about future earnings growth or unique strengths in the business.

However, Simply Wall St’s proprietary “Fair Ratio” model offers a more nuanced picture. Unlike traditional benchmarks, the Fair Ratio (computed here at 40.4x) factors in IBM’s earnings growth, scale, margins, industry, and risk profile to deliver a more tailored assessment of what investors might reasonably pay for the stock. This holistic approach avoids the shortcomings of one-size-fits-all comparisons and provides a deeper sense of whether the price tag matches IBM’s fundamentals.

With a current PE ratio of 36.3x and a Fair Ratio of 40.4x, IBM is trading slightly below its fundamental valuation. The margin is modest, but this suggests IBM’s current price sits in line with expectations, given its performance and outlook.

Result: ABOUT RIGHT

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Upgrade Your Decision Making: Choose your International Business Machines Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives—a smarter, more dynamic approach to investing that goes far beyond static numbers or broad ratios.

A Narrative is essentially your story about International Business Machines. You define what you believe about the company’s strengths, risks, market trends, and prospects, then translate that story into financial forecasts such as assumed fair value, expected revenue growth, and margins.

By linking the company’s story directly with a tailored financial model and fair value estimate, Narratives provide a powerful mechanism to see if your personal outlook justifies buying, holding, or selling the stock.

On Simply Wall St’s platform, millions of investors use Narratives within the Community page to capture their unique perspectives and instantly see how shifts in news, earnings, or guidance impact their view. Narratives update dynamically, helping you stay ahead of the market.

For example, with International Business Machines, some investors believe continued leadership in quantum computing and accelerating AI adoption justifies a bullish fair value of $350 per share, while others see headwinds from hyperscale cloud competitors and prefer a more cautious stance with a fair value as low as $198. Your own Narrative and number might fall anywhere between these ranges.

For International Business Machines, we will make it easy for you with previews of two leading International Business Machines Narratives:

• 🐂 International Business Machines Bull Case

  Fair Value: $350.00

  Current price is 12.1% below this fair value

  Forecast revenue growth: 6.1%

  • Bulls believe adoption of AI, hybrid cloud, and modernization in regulated sectors will drive a larger share in digital transformation budgets, supporting long-term profitability.
  • Integrations such as Red Hat, HashiCorp, and DataStax, along with innovation in quantum computing and automation, are viewed as catalysts for high-margin, recurring software growth and future revenue outperformance.
  • Potential risks include declining legacy revenues, competitive threats, open-source disruption, talent shortages, and high debt, which could constrain growth and margins.
• 🐻 International Business Machines Bear Case

  Fair Value: $287.70

  Current price is 6.9% above this fair value

  Forecast revenue growth: 5.4%

  • Consensus among analysts credits hybrid cloud, AI, and strategic acquisitions for supporting revenue and margin expansion, but views growth as largely in line with sector trends.
  • Investments in z17 mainframe, generative AI, and disciplined cost management are expected to enhance differentiation. However, ongoing macroeconomic and competitive pressures may limit upside potential.
  • Consulting and Software segments could be affected by discretionary spending cuts and currency volatility, with the current share price seen as high given below-average growth prospects.

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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