International Business Machines Corporation (NYSE:IBM) Shares Could Be 21% Below Their Intrinsic Value Estimate

In This Article:

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, International Business Machines fair value estimate is US$283

  • International Business Machines is estimated to be 21% undervalued based on current share price of US$225

  • Our fair value estimate is 28% higher than International Business Machines' analyst price target of US$220

Does the January share price for International Business Machines Corporation (NYSE:IBM) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for International Business Machines

Is International Business Machines Fairly Valued?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF ($, Millions)

US$12.9b

US$14.1b

US$13.7b

US$16.2b

US$16.4b

US$16.6b

US$16.9b

US$17.3b

US$17.6b

US$18.1b

Growth Rate Estimate Source

Analyst x5

Analyst x4

Analyst x2

Analyst x2

Analyst x2

Est @ 1.43%

Est @ 1.79%

Est @ 2.04%

Est @ 2.21%

Est @ 2.34%

Present Value ($, Millions) Discounted @ 8.1%

US$11.9k

US$12.1k

US$10.8k

US$11.9k

US$11.1k

US$10.4k

US$9.8k

US$9.3k

US$8.8k

US$8.3k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$105b