Weekly Valuation – Valutico | May 18, 2023
Link to the valuation
About the company
IBM is a global technology company based in New York that specializes in computing solutions, cloud computing, data analytics, and artificial intelligence. With a strong commitment to research and development, IBM invests in emerging technologies like blockchain, quantum computing, and hybrid cloud solutions. The company has over 300,000 employees worldwide and is dedicated to using technology to make a positive impact on the world.
IBM Takes a leap with AI-Driven hiring strategy
IBM CEO stated that the company will not be hiring individuals for roles that it anticipates could be replaced with artificial intelligence in the future, potentially impacting non-customer-facing positions such as back-office functions and human resources. AI and automation could replace 30% of these positions, according to Krishna. Meanwhile, IBM has acquired three companies in Q1 to expand its capabilities in hybrid cloud and AI. During the Q1 conference call, the company emphasized how AI could boost productivity and reduce costs for enterprises and highlighted the company’s deployment of AI at scale in areas such as HR, finance, and end-to-end processes to speed up task completion and support margin expansion.
Recent Financial Performance
IBM reported steady revenue growth in the first quarter of 2023, with revenues of $14.3 billion, up 0.4% and up 4.4% at constant currency. The company’s software revenue increased by 3%, while consulting revenue increased by 3% and infrastructure revenue was flat at constant currency. Net cash from operating activities was $3.8 billion, and free cash flow was $1.3 billion. IBM expects constant currency revenue growth of 3-5% and $10.5 billion in free cash flow for the full year of 2023. The chairman stated that the company’s unique combination of an open hybrid cloud platform, AI, and business expertise will continue to drive growth and efficiency for clients.
Share Price Performance
IBM has seen a positive return of almost 20% in the past two years, largely due to favorable market trends and the normalization of monetary policy, which benefited value stocks in particular. However, IBM’s performance has lagged behind other value-oriented companies in the same industry, and the spin-off of Kyndryl did not address the company’s most pressing issues. Furthermore, there are concerns regarding IBM’s uncertain dividend and recent acquisition spree. While the stock price peaked at $150 in the past year, it is currently trading at USD122.84 per share.
Five-year share price chart is shown below:
We analyzed IBM by using the Discounted Cash Flow method, specifically our DCF WACC approach, as well as a Trading Comparables analysis. The Discounted Cash Flow analysis produced a value of USD 222 billion using a WACC of 6.4%.
The Trading Comparables analysis resulted in a valuation range of USD 106 billion to USD 235 billion by applying the observed trading multiples EV/Sales, EV/EBITDA, EV/EBIT and P/E. For our Trading Comparables we selected similar peers such as Oracle Corporation, Cisco Systems, Inc. and Alphabet Inc.
Combining our DCF WACC and Trading Comparables analysis results in a valuation range of USD 129 billion to USD 218 billion. In comparison to IBM market capitalization of USD 114 billion we suggest that the company is undervalued. Could the IBM share price break out of its recent sideways trading pattern to the upside to reflect its intrinsic valuation? Let us know in the comments.
Link to the valuation
This article is for informational purposes only and does not constitute investment advice. None of the information contained herein constitutes a solicitation, offer or recommendation to sell or buy any financial instrument.