The big change in IBM the last few years has been a return free-cash-flow generation. At one point in 6 – 7 years ago, I thought IBM was going to run into significant issues given that TTM (trailing twelve month) free-cash flow had fallen to 70% of TTM net income, but IBM’s quality of earnings have improved markedly, and free-cash-flow is back.<\/p>\n
Here’s how this blog evaluates earnings quality for any non-financial company:<\/p>\n
Click on and expand the above spreadsheet for IBM’s earnings quality test.<\/p>\n IBM’s earnings quality has improved nicely since 2022.<\/p>\n Looking at forward earnings estimates, IBM at $285 per share is trading at 26x and 22x expected ’25 and ’26 EPS but only expecting 6% – 7% EPS growth respectively.<\/p>\n While the stock’s PE looks elevated relative to it’s growth rate, IBM TTM cash-flow-per-share and free-cash-flow per share are $15 and $14 respectively, which means the stock is trading today at 15x and 16x those cash-flow metrics, so evaluating the stock on a cash-flow and FCF basis, IBM’s multiple is more attractive given it’s expected growth rates.<\/p>\n Today, the free-cash-flow yield is 6%.<\/p>\n Over the next three years – from ’25 to ’28 – IBM consensus estimates are looking for an average 6% EPS growth on 4% – 5% revenue growth, so you could make the case the stock’s run from it’s previous all-time-high in April ’13 of $215 to today’s $282 – $285, hasn’t been accompanied by much of a change in earnings and revenue growth.<\/p>\n Free-cash-flow has improved for sure, but IBM has not repurchased any IBM stock in the 24 quarters (6 years).<\/p>\n It’s doesn’t sound like Arvind Krishna and the Board are too keen on repurchasing shares at any point in the near future, either. (That may not be a bad thing either. IBM wasted a lot of cash in the Ginny Rometty era buying back stock without a discernable growthy path forward, although I do think Ginny was put in a tough spot when Sam Palmisano left, which was when the growth started to contract.)<\/p>\n Summary \/ conclusion: <\/strong><\/em>The way IBM is trading it appears that sell-side consensus is expecting better AI growth out of IBM, (or maybe even looking down the road further than that to quantum computing), but you could make a case that the stock is extended in the high $200’s here.<\/p>\n However the breakout in IBM’s stock in late September ’24, after being under water for 11 years isn’t to be ignored.<\/p>\n I think it was the great technician Louise Yamada who once said, “the greater the base, the bigger the race higher” which is a reference to the amount of time a stock spends consolidating under all-time-highs, and the power of that time and consolidation, and what it might say about forward returns.<\/p>\n Just looking at the numbers, the analysts aren’t that excited yet about IBM, in terms of walking up estimates. This article<\/a> from SeekingAlpha talks about IBM’s expanding AI book of nearly $6 billion, which was surprising to me that the AI run rate was that high.<\/p>\n The technical breakout on the stock is important: IBM is now a top-ten holding in client accounts, after years of not holding it at all. In Q4 ’24, the stock was quickly bought in bigger quantities when IBM traded above the $213 – $213 previous all-time-high from 2013, and represents an approximate 3% position in client accounts, currently.<\/p>\n Stocks like IBM that were dormant or dramatically underperformed the secular bull market in US stocks from 2013 forward, could hold their value better in a bear market given that dramatically underperforming stocks don’t wear the “crowded trade” crown.<\/p>\n Here’s previous articles on IBM: here<\/a>, here<\/a>, here<\/a> and here.<\/a><\/p>\n None of this is advice or a recommendation, but only an opinion. Past performance is no guarantee of future results. None of the above information may be updated, and if updated, may not be done so in a timely fashion. Readers and investors should gauge their own comfort level with portfolio volatility and adjust accordingly.<\/p>\n Thanks for reading.<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" IBM (IBM) is scheduled to report their Q2 ’25 financial results after the closing bell on Wednesday, July 23rd, 2025.…<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[45],"tags":[],"class_list":["post-18422","post","type-post","status-publish","format-standard","hentry","category-ibm"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/18422","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=18422"}],"version-history":[{"count":9,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/18422\/revisions"}],"predecessor-version":[{"id":18435,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/18422\/revisions\/18435"}],"wp:attachment":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=18422"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=18422"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=18422"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"\"](\"https:\/\/fundamentalis.com\/wp-content\/uploads\/2025\/07\/IBMearningsqualitytest72225.png\")
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