IBM raises its 2025 FCF outlook: IBM stock could be undervalued

International Business Machines Corporation (IBM) reported on October 22 its highest-ever adjusted free cash flow (FCF) margin (i.e. FCF/revenue) of 15% for the year to date ending September 30. Additionally, IBM raised its full-year outlook for FCF, which could send IBM shares up at least 10% to $345.00 per share.

IBM shares closed on Monday, October 27 at $313.09against a recent low of $275.97 on October 16 (i.e. +13.5%).

Investors are likely pleased that management has increased its adjustment for the full year 2025. FCF Outlook for $14 billioncompared to its projection of $13.5 billion by 2025 in the second quarter.

It earns a significant amount of its full-year FCF in the fourth quarter, as its year-to-date adjustment. FCF was only $7.181 billion, implying $6.189 billion (i.e. $14 billion – $7.181 billion so far in Q3) expected for Q4. The adjustment for the fourth quarter of last year. The FCF was 6,163 million dollars. That implies a slight increase this fourth quarter.

It also involves a full year 20.9% FCF margin, as analysts project $67.02 billion in revenue by 2025 (i.e. $14.0 billion / $67.02 billion).

Additionally, based on analyst forecasts for 2026, its full-year FCF could rise even further.

For example, assuming it generates a 21% adjustment. FCF margin next year, and using analyst forecasts of $70 billion in revenue:

0.21 x 70 billion dollars = $14.7 billion FCF for 2026

FCF Performance Target Price. That could lead to a higher share price, based on its historical FCF performance metric.

For example, the trailing 12 month adjustment (TTM). The FCF has been 4.56% (i.e. $13.344 billion TTM / $292.656 billion market cap).

So if we assume that in 2026, with the adj. FCF estimate of $14.7 billion and FCF yield of 4.56%, market cap could rise to $322.4 billion:

$14.7 billion / 0.0456 = $322.4 billion

This is 10.2% more than the current market capitalization of $292,656 million.

In other words, IBM stock could rise more than 10% over the next year to $345 per share:

$313.09 x 1.102 = $345.00

Analysts agree. Yahoo! Finance reports that 20 analysts have an average price target of $313.09. Additionally, AnaChart.com reports that 11 analysts have an average target of $345.69. This is close to my price target derived from FCF performance.

The bottom line is that IBM stock looks cheap based on its strong FCF and analyst price targets.

One way to play IBM is to sell short out-of-the-money (OTM) puts for a lower purchase price and generate additional income.

For example, the options expiration period of November 28 shows that the put option with strike price of $300.00 has a midpoint premium of $6.57. That means a short seller of these puts can earn an immediate return of 2.19%:

$6.57/$300.00 = 0.0219 = 2.19% one-month return

This shows that the strike price is 4% below Monday’s price, i.e. it is out of the money. But, even if IBM stock falls 4% to $300.00 and the short seller’s collateral of $30,000 per contract is allocated to purchase 100 shares, the breakeven point is even lower:

$300.00 – $6.57 = $293.43 breakeven point

$293.43 B/E / $313.09 trading price -1 = -6.23% downside protection

The point is that by shorting the $300.00 put, the investor has a potential call 6.23% lower than the current trading price.

Meanwhile, the investor earns a return of 2.19% per month while waiting for this lower potential buy point.

Furthermore, even if that happens, the advantage is quite good:

Target $345 / breakeven point $293.43 -1 = 0.1758 = +17.6% the other way around

The bottom line is that IBM stock appears to be undervalued here, and one way to capitalize on this is to sell out-of-the-money puts.

On the date of publication, Mark R. Hake, CFA had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com