Is IBM's Stock Overvalued Or Undervalued?

IBM IBM shares have lagged the S&P 500 in 2021, generating a year-to-date total return of 16.8%. The stock is getting hit hard in Thursday's session following mixed quarterly earnings.

IBM is fighting to adapt and modernize its business model to a cloud-centric, subscription-based business, but value investors may be wondering if there’s any value in IBM shares at their current price.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is currently at about 28.2, nearly double its long-term average of 15.9.

IBM’s PE is currently 24.5, below the S&P 500 average as a whole. However, IBM's PE ratio is up 77.7% over the past five years, suggesting the stock is currently priced at the high end of its historical valuation range.

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Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.3. IBM’s forward earnings multiple of 12 is still well below the multiple of the S&P 500 as a whole, making IBM's stock look undervalued.

IBM’s forward PE ratio is less than half its technology sector peers, which are currently averaging a 25.1 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 0.9; IBM’s PEG is 1.48, suggesting IBM is slightly overvalued after accounting for its growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.06, well above its long-term average of 1.62. IBM’s PS ratio is 1.7, significantly below the S&P 500 as a whole.

Finally, Wall Street analysts see value in IBM stock over the next 12 months. The average analyst price target among the 14 analysts covering IBM is $149.50, suggesting about 15% upside from current levels.

The Verdict: At its current price, IBM stock appears to be fairly valued based on a sampling of common fundamental valuation metrics.