International Business Machines CorporationIBMNYSE

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DCF Valuation

DCF Valuation Summary

Strong Buy

Fair Value: $438.65 per share(market-calibrated)

+83.3%

Upside to Fair Value

Current

$239.37

Pure Model

$516.38

Fair Value

$438.65

Bull Case

$657.20

Bear Case

$379.89

Market Reality Check

Model Terminal Growth

3.75%

Market-Implied Growth

0.50%

Calibrated Growth

2.61%

Fair value uses 65% model / 35% market-implied terminal growth. Pure model: $516.38.

What's Driving This Ratingfor IBM

✓

CapEx already efficient

CapEx at 2.92% of revenue is already at or below sector maintenance level. No normalization needed — cash conversion is already strong.

↑

Margin expansion modeled

Current EBIT margin is 12.23% — below the sector mature average of 25.00%. Model expands margins as the business scales and operating leverage kicks in. Year 10 EBIT reaches $20.4B (20.81% margin).

→

Moderate revenue growth

Analyst consensus projects 5.38% revenue growth, fading to 3.75% by Year 10. Revenue reaches $97.9B (vs $67.5B today).

🎯

Market pricing in lower growth than model

The market implies only 0.50% perpetual growth — 325bps below the model's 3.75%. This suggests the market sees headwinds or risks not in the model.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 72.98% indicates efficient cash generation. FCF reaches $20.2B by Year 10 (20.66% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)0.69

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)7.61%

Cost of Debt

Pre-tax Cost of Debt2.27%

Tax Rate21.00%

After-tax Cost of Debt1.79%

Equity Weight (E/V)76.87%

Debt Weight (D/V)23.13%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (76.87% × 7.61%) + (23.13% × 1.79%)

= 6.26%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$71.2B	$78.3B	$82.9B	$88.1B	$97.9B
EBIT	$8.7B	$9.6B	$10.1B	$14.8B	$20.4B
Tax	$1.8B	$2.0B	$2.1B	$3.1B	$4.3B
NOPAT	$6.9B	$7.6B	$8.0B	$11.7B	$16.1B
+ Depreciation	$5.3B	$5.9B	$6.2B	$6.6B	$7.3B
- Capex	$2.1B	$2.3B	$2.4B	$2.6B	$2.9B
- Δ NWC	$364M	$385M	$228M	$273M	$354M
Free Cash Flow	$9.8B	$10.8B	$11.6B	$15.5B	$20.2B
Discount Factor	0.941	0.833	0.738	0.654	0.545
Present Value	$9.2B	$9.0B	$8.5B	$10.1B	$11.0B

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$20.2B

Terminal Growth Rate3.75%

WACC6.26%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$834.1B

PV of Terminal Value$454.3B

Exit Multiple Method

Year 10 EBITDA$27.7B

Exit Multiple (EV/EBITDA)28.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$775.6B

PV of Terminal Value$422.4B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$96.6B

PV of Terminal Value$454.3B

Enterprise Value$550.9B

(-) Net Debt$53.5B

Equity Value$497.4B

Shares Outstanding932M

Price per Share$533.47

Exit Multiple Method

PV of Projected FCFs$96.6B

PV of Terminal Value$422.4B

Enterprise Value$519.0B

(-) Net Debt$53.5B

Equity Value$465.5B

Shares Outstanding932M

Price per Share$499.29

Pure Model Fair Value

$516.38

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	2.75%	3.25%	3.75%	4.25%	4.75%
4.26%	$666.81	$636.92	$608.44	$581.31	$555.44
5.26%	$566.21	$633.66	$608.44	$581.31	$555.44
6.26%	$445.37	$474.98	$516.38	$578.32	$555.44
7.26%	$369.49	$385.41	$405.85	$433.07	$471.11
8.26%	$315.17	$324.76	$336.48	$351.12	$369.92

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$379.89

58.7% vs current

• -25% vs analyst consensus
• Terminal growth: 3.3%
• Beta: 0.86

Base Case

$516.38

115.7% vs current

• Analyst consensus
• Terminal growth: 3.8%
• Beta: 0.69

Bull Case

$657.20

174.6% vs current

• +25% vs analyst consensus
• Terminal growth: 4.3%
• Beta: 0.59

Key Assumptions & Drivers✓ Using Analyst Consensus Estimates• Technology Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth5.38%

Year 3 Revenue Growth5.17%

Year 5 Revenue Growth2.83%

Year 7 Revenue Growth3.20%

Year 10 Revenue Growth3.75%

Terminal Growth Rate3.75%

Margin & Efficiency

Current EBIT Margin12.23%

Terminal EBIT Margin25.00%

Tax Rate21.00%

Historical Capex / Rev2.92%

NWC / Revenue10.00%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 28x EV/EBITDA (Technology sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

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