International Business Machines Corporation

Date: April 20, 2024.

Company’s Overview

IBM (IBM), a tech titan with a global presence, is a one-stop shop for businesses. They offer a vast array of solutions, from cloud computing and artificial intelligence to traditional hardware and software. From powering businesses in New York to developing cutting-edge tech, IBM’s services touch nearly every corner of the technological landscape.

Competition

Revenue Segments

The Company’s net sales proportions by segment for the most recent quarterly report are composed by:

Related Risks

Their ongoing transformation from legacy hardware to cloud-based services is complex and expensive, with success uncertain. Tech giants like Microsoft and Amazon are fierce competitors, vying for market share in the cloud and AI space. Economic downturns can also squeeze IT spending by businesses, impacting IBM’s revenue. Attracting and retaining top talent in the competitive tech industry is crucial for innovation, and evolving regulations can add another layer of complexity.

Financial Analysis

Company’s Revenues

Revenues from 2021 to 2023:

• IBM annual revenue for 2023 was $61.86B, a 2.2% increase from 2022.
• IBM annual revenue for 2022 was $60.53B, a 5.54% increase from 2021.
• IBM annual revenue for 2021 was $57.35B, a 3.93% increase from 2020.

The yearly revenue from 2010 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Company’s Net Income

Net Income from 2021 to 2023:

• IBM annual net income for 2023 was $7.502B, a 357.72% increase from 2022.
• IBM annual net income for 2022 was $1.639B, a 71.46% decline from 2021.
• IBM annual net income for 2021 was $5.743B, a 2.74% increase from 2020.

The yearly net income from 2010 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Company’s EPS

EPS from 2021 to 2023:

• IBM 2023 annual EPS was $8.14, a 352.22% increase from 2022.
• IBM 2022 annual EPS was $1.8, a 71.65% decline from 2021.
• IBM 2021 annual EPS was $6.35, a 1.93% increase from 2020.

Company’s Free Cash Flow

Free Cash Flow from 2021 to 2023:

• IBM annual free cash flow for 2023 was $13.007B, a 41.38% increase from 2022.
• IBM annual free cash flow for 2022 was $9.2B, a 17.27% decline from 2021.
• IBM annual free cash flow for 2021 was $11.121B, a 29.47% decline from 2020.

The yearly free cash flow from 2010 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Shares Outstanding

On October 30, 2018, the Board of Directors authorised $4.0 billion in funds for use in the company’s common stock repurchase program.

Asset/Liabilities & Current Ratio

Unveiling IBM’s financial health reveals a somewhat concerning picture. The asset-to-liability ratio of 1.2 indicates their assets (resources) are only slightly higher than their debts (liabilities). This limited buffer could restrict their ability to invest heavily in research and development, crucial for staying ahead of the curve in the fast-paced tech industry.

The current ratio of 0.96 paints an even bleaker short-term picture. This metric measures a company’s ability to meet short-term obligations (debts due within a year) using short-term assets (cash, receivables). A ratio below 1, like IBM’s, suggests they might struggle to cover their immediate financial commitments without relying on additional funding or asset sales. This lack of readily available resources could hinder their ability to react swiftly to short-term market fluctuations or capitalise on time-sensitive opportunities.

Valuation

Based on the DFC analysis, IBM’s price is undervalued, showing an intrinsic value of $142. As key metrics, we considered 10% Required Rate of Return (RRR) and 20% margin of safety. Note that in the analysis we take into consideration also the cash and cash equivalents and the total debt.

The company has received a range of ratings from buy to sell. Specifically, there were 7 buy, 1 overweight, 9 hold, 2 underweight and 2 sell ratings. The consensus rating leans toward hold.

Investing in IBM presents a challenging proposition. Their financial performance is a major concern. Over the past decade, they’ve experienced a negative 10-year revenue CAGR and a dismal -6.1% Diluted EPS CAGR. This translates to declining revenues, net income, and free cash flow — not a pretty picture. This weakness is compounded by a hefty long-term debt of $50 billion, a low asset-to-liability ratio of 1.2, and a barely adequate current ratio of 0.96. These factors limit their ability to invest in growth and navigate challenges. Their low ROIC of 6.64% further indicates they’re not generating strong returns on invested capital. Even their stock appears slightly overvalued based on DCF analysis, and their P/E ratio, at 23.25, is just below the industry median.

On the bright side, IBM is a well-established industry leader with a superior gross margin (55.54%) compared to the industry average. Their healthy net margin (12.14%) also suggests they manage their costs effectively. However, these strengths are overshadowed by the significant financial burdens and recent performance. For now, IBM seems like a risky investment with a long road to recovery ahead.

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Disclaimer

Please note that I am not a licensed financial advisor and the information provided here should not be construed as financial advice. I am simply sharing my understanding of the topics based on my research and personal experiences. It is always advisable to consult with a qualified financial advisor before making any investment decisions.

The information I provide is based on publicly available sources and my own interpretations. I strive to provide accurate and up-to-date information, but I cannot guarantee the correctness or completeness of the information.

Any opinions expressed here are my own and do not necessarily reflect the views of any other individual or organisation.

Please use your own judgement and conduct your own research before making any investment decisions.