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IBM Corporation (IBM) reported Good free cash flow results last week for Q1, including high FCF margins. Given its apparent cheapness, is it time to buy IBM stock now? One way to play this is to short out-of-the-money put options.
IBM is at $232.93 in midday trading on Monday, April 28. That is up from its recent lows but still off its 6-month peak of $264.74 on Feb. 20.
On April 23, 2025, IBM released its Q1 earnings results and updated its guidance for the full year. IBM is one of the few public companies that provides its free cash flow (FCF) results and also provides projections for FCF.
For example, IBM said revenue was up 1% to $14 billion, but its free cash flow (FCF) for the quarter rose by +2.7% to $1.962 billion. Moreover, as the table below shows, the company's free cash flow margins (i.e., FCF/revenue) rose from 13.2% a year ago to 13.5%
This means that the company is controlling its non-CapEx costs very well, and higher revenue is not automatically spent on higher costs, but is saved by the company.
Moreover, based on Seeking Alpha data, over the trailing 12 months (TTM) ending March 31, IBM has generated $12.6 billion in FCF on revenues of $62.125 billion. That represents 20.3% of TTM sales.
FCF Forecasts and Price Target
IBM reported that it still expects to generate $13.5 billion in FCF this year. Based on this past quarter's results, analysts' forecasts support this. Here's why.
Analysts now expect to see $66.13 billion in revenue this year and $68.81 billion in 2026. That means if IBM continues to make 20.3% full-year FCF margins:
$66.13b revenue x 0.203 = $13.4 billion FCF forecast
However, the market is more forward-looking when setting the stock's valuation. For example, an average of 2025 and 2026 revenue results in a next 12-month (NTM) revenue forecast of $67.47 billion. As a result, here is the NTM FCF forecast:
$67.47b x 0.203 = $13.7 billion NTM FCF
That could lead to a higher stock valuation for IBM, which is $216.4 billion today. Here's why.
The market has historically tended to value IBM stock on a 5.5% FCF yield metric. That is the same as multiplying FCF by 18.2x (i.e., 1/0.055=18.2x). As a result, its market cap could rise to almost $250 billion:
$13.7b NTM FCF x 18.2 = $249.3 billion est. mkt cap
That is 15.2% higher than its present $216.2 billion market value. In other words, IBM could be worth at least 15.2% more, or $268.32 per share:
$232.92 x 1.152 = $268.32 price target using a 5.5% FCF yield
Analysts Agree IBM is Undervalued
Yahoo! Finance's survey of 22 analysts shows an average price target of $252.42 per share, similar to Barchart's survey mean of $250.94.
In addition, AnaChart.com shows that 16 analysts who have written on the stock recently have an average price target of $262.03. That is closer to the FCF-yield metric price target above of $268.32.
The bottom line is that analysts still see IBM as undervalued. However, there is no guarantee that this upside will happen quickly, or even over the next year.
Therefore, one way to play this stock is to set a lower buy-in target price and get paid while waiting for the stock to fall. That is what happens with a short-put play in out-of-the-money (OTM) put options of nearby expiry periods.
Shorting OTM Puts
For example, the May 30 expiry period shows that the $225.00 put strike price has a midpoint premium of $4.68 per put option contract. That means a short-seller of these puts can make an immediate yield over the next month of over 2% (i.e., $4.68/$225.00 = 0.208 = 2.08%).
This strike price is just over 3.3% below today's trading price, so it is out-of-the-money (OTM). Moreover, even if IBM falls to $225.00 the investor's breakeven is lower:]
$225.00 - $4.68 = $220.32, or 5.49% below the trading price
The bottom line is that this is a good way to potentially set a lower buy-in target and still get paid at least 2.0% over the next month. The bottom line is that IBM stock still looks cheap here, and shorting OTM puts may be a good way to set a buy-in price.
