International Business Machines Corporation (NYSE: IBM) – Are IBM Stocks Overvalued or Undervalued?
IBM (NYSE: IBM) stocks lagged the S&P 500 in 2021, generating a cumulative total return of 16.8%. The action is hit hard during Thursday’s session after mixed quarterly results.
IBM is struggling to adapt and modernize its business model to a cloud-centric, subscription-based business, but value-driven investors may wonder if there is value in IBM stocks at their current price.
Earnings: A price-to-earnings (PE) ratio is one of the most basic fundamental measures to assess the value of a stock. The lower the PE, the higher the value. For comparison, the S&P 500 PE is currently around 28.2, almost double its long-term average of 15.9.
IBM’s PE is currently 24.5, lower than the average for the S&P 500 as a whole. However, IBM’s PE ratio is up 77.7% over the past five years, suggesting that the stock is currently listed at the high end of its historic valuation range.
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Growth: Looking ahead to the next four quarters, the S&P 500 futures PE ratio looks much more reasonable at just 20.3. IBM’s multiple of 12 of futures earnings is still well below the multiple of the S&P 500 as a whole, making IBM’s stock appear undervalued.
IBM’s futures PE ratio is less than half of its tech peers, which currently average a futures earnings multiple of 25.1.
However, when it comes to valuing a stock, profits aren’t everything.
Growth rate is also critical for businesses that build their bottom line quickly. The price / earnings / growth ratio (PEG) is a good way to incorporate growth rates into the valuation process. The overall PEG of the S&P 500 is currently around 0.9; IBM’s PEG is 1.48, which suggests that IBM is slightly overvalued after taking its growth into account.
The price-to-sales ratio is another important valuation metric, especially for unprofitable companies and growth stocks. The S&P 500’s SP ratio is currently 3.06, well above its long-term average of 1.62. IBM’s PS ratio is 1.7, significantly lower than the S&P 500 as a whole.
Finally, Wall Street analysts see the value of IBM shares over the next 12 months. The average analyst price target among the 14 analysts covering IBM is $ 149.50, which suggests an increase of about 15% from current levels.
The verdict: At its current price, IBM stock appears to be fairly priced based on a sample of common fundamental valuation metrics.
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