IBM (IBM)

Technology and consulting giant IBM (NYSE:IBM) announced better-than-expected revenue in Q1 CY2025, but sales were flat year on year at $14.54 billion. Guidance for next quarter’s revenue was better than expected at $16.56 billion at the midpoint, 1.9% above analysts’ estimates. Its non-GAAP profit of $1.60 per share was 12% above analysts’ consensus estimates.

Company Overview

With a corporate history spanning over a century and once known for its iconic mainframe computers, IBM (NYSE:IBM) provides hybrid cloud computing platforms, AI solutions, consulting services, and enterprise infrastructure to help businesses modernize their operations.

IT Services & Consulting companies stand to benefit from increasing enterprise demand for digital transformation, AI-driven automation, and cybersecurity resilience. Many enterprises can't attack these topics alone and need IT services and consulting on everything from technical advice to implementation. Challenges in meeting these needs will include finding talent in specialized and evolving IT fields. While AI and automation can enhance productivity, they also threaten to commoditize certain consulting functions. Another ongoing challenge will be pricing pressures from offshore IT service providers, which have lower labor costs and increasingly equal access to advanced technology like AI.

IBM competes with cloud and software providers like Microsoft (NASDAQ:MSFT), Amazon Web Services (NASDAQ:AMZN), and Oracle (NYSE:ORCL); consulting firms such as Accenture (NYSE:ACN) and Capgemini; and hardware manufacturers including Dell Technologies (NYSE:DELL) and Hewlett Packard Enterprise (NYSE:HPE).

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $62.83 billion in revenue over the past 12 months, IBM is a behemoth in the business services sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices. However, its scale is a double-edged sword because it’s harder to find incremental growth when you’ve penetrated most of the market. For IBM to boost its sales, it likely needs to adjust its prices, launch new offerings, or lean into foreign markets.

As you can see below, IBM grew its sales at a sluggish 1.8% compounded annual growth rate over the last five years. This shows it failed to generate demand in any major way and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. IBM’s annualized revenue growth of 1.8% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

IBM also breaks out the revenue for its most important segment, Software. Over the last two years, IBM’s Software revenue averaged 7.6% year-on-year growth. This segment has outperformed its total sales during the same period, lifting the company’s performance.

This quarter, IBM’s $14.54 billion of revenue was flat year on year but beat Wall Street’s estimates by 1%. Company management is currently guiding for a 5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 5% over the next 12 months, an improvement versus the last two years. This projection is above the sector average and suggests its newer products and services will fuel better top-line performance.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

IBM has managed its cost base well over the last five years. It demonstrated solid profitability for a business services business, producing an average operating margin of 13.4%.

Analyzing the trend in its profitability, IBM’s operating margin rose by 3.7 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, IBM generated an operating profit margin of 7.2%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

IBM’s flat EPS over the last five years was below its 1.8% annualized revenue growth. However, its operating margin actually expanded during this time, telling us that non-fundamental factors such as interest expenses and taxes affected its ultimate earnings.

Diving into the nuances of IBM’s earnings can give us a better understanding of its performance. A five-year view shows IBM has diluted its shareholders, growing its share count by 3.7%. This dilution overshadowed its increased operating efficiency and has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, IBM reported EPS at $1.60, down from $1.68 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects IBM’s full-year EPS of $10.25 to grow 6.5%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

IBM has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 17% over the last five years.

Taking a step back, we can see that IBM’s margin was unchanged during that time, showing its long-term free cash flow profile is stable.

IBM’s free cash flow clocked in at $1.72 billion in Q1, equivalent to a 11.9% margin. The company’s cash profitability regressed as it was 1.4 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

IBM historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 11.2%, somewhat low compared to the best business services companies that consistently pump out 25%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, IBM’s ROIC averaged 2.8 percentage point increases each year. This is a good sign, and we hope the company can continue improving.

IBM reported $17.47 billion of cash and $66.84 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $16.57 billion of EBITDA over the last 12 months, we view IBM’s 3.0× net-debt-to-EBITDA ratio as safe. We also see its $288 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing IBM beat analysts’ revenue, adjusted EPS, and EBITDA expectations this quarter. We were also glad its revenue guidance for next quarter exceeded Wall Street’s estimates. On the other hand, its operating income missed significantly. Overall, we think this was a decent quarter with some key metrics above expectations. The areas below expectations seem to be driving the move, and shares traded down 5% to $233 immediately after reporting.

Updated: May 16, 2025 at 11:47 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own IBM, you should also grasp the company’s longer-term business quality and valuation.

We see the value of companies helping consumers, but in the case of IBM, we’re out. To begin with, its revenue has declined over the last five years. And while its scale makes it a trusted partner with negotiating leverage, the downside is its weak EPS growth over the last five years shows it’s failed to produce meaningful profits for shareholders. On top of that, its mediocre ROIC lags the market and is a headwind for its stock price.

IBM’s P/E ratio based on the next 12 months is 24.4x. At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $252.27 on the company (compared to the current share price of $264.05), implying they don’t see much short-term potential in IBM.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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