IBM (IBM)

Total return at 5 years: 2.0%/year = -1.3% appreciation + 3.2% dividend. The target price ($213) is ex-dividend; the $36 in dividends collected over 5 years are added separately.

The methods disagree: one places the value today above the price ($227) and the other below.

Today — expensive, no margin of safety: at $227 trades ~12.2% above its value discounted to today (~$202); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Preserva valor: the target price ($213) plus dividends yield just enough to preserve nominal capital, below the required 4% floor.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$130.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($227) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-0.3%/year) than we project (5.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$11 bn of owner earnings in year 5 (vs ~$14.3 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on EV/owner-FCF (flujo de caja libre neto de SBC). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Rolling grid: the base year is the real TTM (revenue of US$69.1 billion as of Jun 30, 2026). The metric is owner-FCF net of stock-based compensation: the base-year cash margin (17.7%) is operating cash flow net of SBC (~$1.8bn, a real cost §3 — raw operating flow is 20.3%); the amortization of Red Hat/HashiCorp intangibles (~$2.7bn, non-economic) is added back. EV/owner-FCF compresses from ~21× to ~16× over five years as the flow compounds (~+5%/year, software +10% diluted by stagnant consulting + cyclical infrastructure). Corporate net debt (~$31.7bn = non-financing debt $46.2bn − cash $14.5bn) goes in the bridge; financing debt ($15.1bn, self-funded by the loan book) is excluded. IBM dilutes ~1.2%/year through SBC (no buybacks since 2019) → no share path, the cost is already in the metric; the surplus goes to M&A (HashiCorp, Confluent) + the dividend (an aristocrat of 31 years). ⚠️ The stock fell in Jul-2026 after a second-quarter pre-announcement (Infrastructure −7%, execution misses + fear that AI cannibalizes the sales cycle). The market's 'cheap cash flow' misleads (it adds back SBC + ignores debt); the real figure is ~21×, reverting to 16×.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $213 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $227, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $213 in 5 years plus $36 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $202. Against the current market price ($227), the margin of safety is -12.2% (trades above the maximum → a premium is paid) and the total return at that price would be 2.0% annually.

• Multiple vs the band. EV/owner-FCF ~22× net of stock-based compensation and debt — fair value after the plunge, the low end of the quality-software band. The market's 'cheap cash flow' is misleading (it adds back stock-based compensation and ignores debt).
• The Jul-2026 plunge. It corrected the overvaluation IBM had reached at the peak of AI enthusiasm toward a more reasonable value — but it didn't create a bargain. At ~22× EV/owner-FCF with modest consolidated growth, IBM trades at a fair price.
• Margin of safety. Base case 5y ~$213 vs. price ~$227 → total return +2%/year, of which the dividend (yield 3.0%) is a central part. Little margin of safety; the asymmetry isn't especially favorable.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (101%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• ROIC vs the 10% bar. ROIC 14.0% — backed by segment-margin expansion across all four lines during 2025; lower-margin Consulting and capital directed to M&A dilute it against pure software.
• Quality of cash. Free cash flow (IBM's own measure) is strong; net of stock-based compensation it yields the owner-FCF that underpins the valuation.
• Balance sheet and pension. Corporate net debt ~US$31,700 million (investment grade); the pension has a net deficit of ~US$2,284 million (obligations US$47,103 million vs. assets US$44,820 million). Manageable, but leveraged by M&A.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

IBM's engine in 2025 was the mix shift toward high-margin software: Software (44.4% of revenue, ARR US$23,600 million) grew +10.6% with Red Hat (OpenShift ARR US$1,900 million, +30%), automation and watsonx. Consulting (31.2%), far from merely stalled, per the 10-K itself 'returned to a growth trajectory in the second half of 2025,' with backlog of US$31,900 million and a book-to-bill of 1.03; Infrastructure (23.3%) is cyclical, driven for the year by the z17 (IBM Z +51.7%). The dividend is a central piece of shareholder return; there has been no buyback since the Red Hat acquisition closed in 2019 (excess cash goes to the dividend and M&A: HashiCorp, Confluent).

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, not nominal. Reported growth (+7.6%) already differs by 1.5 points from constant-currency growth (+6.1%); Software (+10.6%, ARR US$23,600 million) is the real engine, diluted by Consulting and cyclical Infrastructure.
• Growth engine. Software (ARR growing US$2,000 million for the year) and a Consulting practice that, per the 10-K itself, returned to a growth trajectory in the second half of 2025, with rising backlog.
• Disruption / cycle. Artificial intelligence (potential cannibalization) and the mainframe cycle (the z17, after driving IBM Z revenue +51.7% in 2025, showed signs of exhaustion in the Jul-2026 pre-announcement) are the risks to growth — both postdating this filing's close.

• Relevant in 10 years (recurrence). The mainframe, Red Hat and recurring software (ARR of US$23,600 million) are captive critical infrastructure; IBM Z processes, per the company itself, 70% of the world's transactions. High recurrence at the core; Consulting is more cyclical.
• Pricing power. Strong in the mainframe (captive) and in Red Hat; weaker in Consulting (competes for talent) and pressured by hyperscalers in the rest of software.
• Moat and its direction. A wide but uneven moat; 2025's evidence — segment margin expanding across all four lines, Consulting backlog rising with a book-to-bill of 1.03 — points to a moat that holds during the filing's fiscal year.
• Artificial-intelligence disruption. The risk the market began pricing in after this filing's close: does AI strengthen (watsonx) or cannibalize (hyperscalers capture the spend) the business? The 10-K itself frames the risk as reputational and execution-related, not direct Consulting cannibalization — a distinction this filing doesn't fully allow resolving.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• !Leverage (net debt / EBITDA)Net debt / EBITDA 1.8x
• !Interest coverage (EBIT / interest)6.5x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 101% of ROIC
• !Value creation (ROIC − 10% bar)+4pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.3x — no over-investment
• !Float / working capitalConsumes cash $3.9 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 2.7% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Corporate net debt ~US$31,700 million (investment grade A-/A3/A-, stable); the Financing-segment debt (US$15,093 million) is self-funded, matched to the client credit portfolio. In compliance with all financial covenants.
• Pension. Pension and post-retirement health obligations of US$47,103 million versus assets of US$44,820 million — a net deficit of ~US$2,284 million. The main US qualified plan is overfunded at 137%; no legal obligation to contribute to the US plans in 2026.
• Dividend sustainability. Free cash flow comfortably covers the dividend and M&A. The buyback suspension since the Red Hat acquisition closed in 2019 is confirmed in the filing; the characterization of a dividend paid without interruption since 1916 refers to a source not reviewed in this exercise.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Skin in the game. Krishna holds 86× his base salary in stock (requirement 10×, peer median 7×); no founder control (no individual owns more than 1% of the equity). No hedging or pledging of shares.
• Capital allocation. The dividend plus disciplined M&A (Red Hat, HashiCorp, Confluent pending) reorienting the business toward software. No buyback since the Red Hat acquisition closed in 2019.
• Execution. The pivot toward software and artificial intelligence was successful during 2025 per this filing; scrutiny on execution rose with the second-quarter-2026 pre-announcement, after this 10-K's close.

• The Jul-2026 plunge (after this filing's close) makes IBM look cheap on the market's 'free cash flow', but net of stock-based compensation and corporate net debt it's ~22× EV/owner-FCF — fair value, not a bargain.
• The plunge reflects risks the market began pricing in after this 10-K's close: the mainframe cycle exhausting (the z17 had driven IBM Z revenue +51.7% in 2025) and fear that artificial intelligence could cannibalize the software and consulting sales cycle — a risk the filing itself frames differently (reputational and execution-related, not direct cannibalization).
• The 2023-2025 re-rating (from value trap to AI bet) partially reversed with the plunge; the market is re-evaluating whether AI strengthens or cannibalizes IBM, a question this 10-K — closed before the event — doesn't resolve.

An ambiguous case: the plunge has the shape of a motivated sale (a reaction to a recent pre-announcement), but over genuine underlying issues the 10-K itself already hinted at before the event (modest consolidated growth, low-margin Consulting, mainframe cyclicality). It isn't the clear bargain of a business punished by an exaggerated fear: at ~22× EV/owner-FCF with modest consolidated growth, IBM is fair value, not a deep discount. The perception-reality gap isn't clearly evident in either direction with this filing's information; the second-quarter-2026 report is what will resolve it.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -8%/year (-34% total): the margin of safety protects the downside. The bull (+10%/year, +61% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Artificial-intelligence disruption. The 10-K itself frames the artificial-intelligence risk as reputational and execution-related — not being recognized as a leader with strong governance, or the technology not working as expected — and as a new source of cyberattack vectors; the market, after this filing's close, also began to fear direct cannibalization of the software and consulting sales cycle.
• Post-filing uncertainty. The second-quarter-2026 pre-announcement (after this 10-K's close) triggered a plunge in the stock; the full report with revised guidance is not reflected in these sections.
• Mainframe cycle and supplier concentration. The z17 drove IBM Z revenue +51.7% in 2025, but Infrastructure (23.3% of revenue) depends on the next cycle; also, certain lines rely on a limited number of processor-technology suppliers for semiconductors.
• Debt, financial covenants and open-source reliance. Total debt rose US$6,300 million in 2025 (and another US$7,400 million in the first quarter of 2026) while the financial covenant requires consolidated net interest expense coverage no lower than 2.20 to 1.0; Red Hat, software's fastest-growing asset, relies on open-source communities that IBM does not directly employ.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 14% above the 10% bar, but the price sits above value (no margin) → great business, expensive.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 5% at a multiple/growth of 4.4 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 5% (EBIT/EV) + ROIC 14% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -0% vs our 5%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -12%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, intangibles, efficient scale, network effects → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -0%, within what we project (5%) — the story squares with the numbers.