IBM's Q3 Growth Highlights Execution but Reinforces Overvaluation Concerns

What happened

IBM's stock surged 8% to $324 after FQ3 2025 results showed 7% revenue growth and a 15% EPS increase, driven by strong performance in software, automation, and hybrid cloud segments. Infrastructure led with 15% YoY growth, bolstered by hybrid infrastructure and IBM Z systems, while consulting remained weak at 2% growth. Despite this momentum, the stock trades at a 20% premium to peers, and DeepValue's analysis reveals a P/E of 33.5x and an 86% overvaluation versus the DCF intrinsic value of $152.89. High net debt/EBITDA of 3.65x and interest coverage of 6.07x highlight balance sheet risks, compounded by macro volatility and AI regulatory uncertainties. The recent gains do not offset the fundamental overvaluation, keeping the SELL recommendation intact.

Implication

IBM's Q3 results demonstrate solid execution in hybrid cloud and AI, but the stock's 20% peer premium and 86% overvaluation signal high downside risk. Infrastructure growth is a positive, yet weak consulting and elevated net debt/EBITDA of 3.65x constrain financial flexibility and margin of safety. DeepValue's SELL stance is reinforced by the lack of material improvement in free cash flow variability and deleveraging, with key watch items like z17/Power11 cycles and AI traction still needing sustained proof. Macro and regulatory headwinds add uncertainty, making patience crucial until cash flow and debt metrics show durable gains. Overall, the recent performance does not alter the bearish outlook, and investors should prioritize risk management over short-term optimism.

Thesis delta

The Q3 results confirm IBM's ability to grow in hybrid cloud and AI but do not materially change the overvaluation and risk profile. The SELL thesis remains unchanged, as the stock's premium and balance sheet concerns outweigh the positive growth drivers. A shift would require consistent outperformance in free cash flow, debt reduction, and consulting acceleration.