IBM's Hybrid Cloud and AI Pivot Drives Strong Results, But Valuation Remains Stretched

What happened

IBM has successfully refocused its business on higher-margin software, hybrid cloud, and AI, with these segments now representing 76% of revenue. The company delivered robust Q3 2025 performance, with constant currency revenue up 7% and adjusted EPS up 15%, driven by 10.5% growth in Software and a 17% surge in Infrastructure. However, the stock has rallied 32% over the past year to ~$309 per share, trading at rich multiples like a P/E of 36.5x and EV/EBITDA of 28x, which is over 100% above a DCF-based intrinsic value estimate. Despite solid fundamentals including durable mainframe cash flows and strong free cash generation, the valuation embeds aggressive growth assumptions that contrast with IBM's historical mid-single-digit revenue CAGR and introduce risks from elevated leverage and M&A integration. A recent Seeking Alpha article echoes these concerns, noting IBM's overvaluation while acknowledging its dividend safety and balance sheet strengths, underscoring the tension between strategic progress and price.

Implication

The market has priced IBM like a high-growth AI play, but its historical performance and integration challenges from acquisitions like HashiCorp and Confluent suggest this optimism may be premature. Elevated leverage at 3.65x net debt/EBITDA and slow dividend growth further limit upside, while rising share count dilutes per-share returns. Existing holders should consider trimming exposure to lock in gains and reduce vulnerability to potential multiple compression if growth disappoints. New capital would be better deployed elsewhere unless IBM demonstrates sustained high-single-digit organic growth or the stock corrects to a more reasonable valuation. Monitoring key catalysts such as AI monetization and debt reduction is essential for any future investment decision.

Thesis delta

The Seeking Alpha article corroborates the DeepValue report's 'POTENTIAL SELL' stance, affirming that IBM's strategic pivot has not altered the core issue of overvaluation relative to its growth profile. No substantive shift in the thesis is indicated; both sources emphasize that the stock's rally has outpaced fundamental improvements, maintaining a cautious outlook. Investors should remain patient for either a price pullback or clear evidence that AI and hybrid cloud initiatives can drive structurally higher, recurring revenue to justify current multiples.