Microsoft vs. IBM: Can a $34B Acquisition Help IBM Return to Glory?

Which is the better investment, Microsoft or IBM?
  • Microsoft is now the second-most valuable public company in the world following Amazon’s tumble on Friday.
  • IBM is shelling out $34 billion to purchase Red Hat.
  • IBM is the better value buy with a stronger dividend yield, but Microsoft is showing impressive growth.

The tech world was recently shaken by a few major shocks. On Friday, Oct. 26, the sell-off prompted by Amazon’s (AMZN) disappointing revenue numbers pushed the e-retail giant out of the No. 2 spot for market cap, making Microsoft the second-most valuable public company. Meanwhile, IBM made a big splash on Monday, Oct. 29, with news that it would be purchasing the open-source software company Red Hat for a whopping $34 billion, potentially beefing up its cloud-computing arm moving forward.

So, which of these old-school tech firms has the legs to keep delivering returns for your portfolio: Microsoft or IBM? Here’s a closer look.

Microsoft vs. IBM Stock Comparison

Here’s a basic comparison of Microsoft and IBM:

MSFTIBM
Share Price$103.85$119.64
Market Cap$797.2 billion$109.2 billion
Most Recent FY Revenue$110.4 billion$79.1 billion
Most Recent FY Profits$16.6 billion$5.8 billion
Most Recent FY Revenue Growth14.28%-0.98%
Most Recent FY Profit Growth-35%-51.54%
GOBankingRates’ Net Worth Evaluation$236.7 billion$109.2 billion
P/E Ratio48.7619.27
P/S Ratio7.221.36
Stock Gain/Loss Last Month-9.20%-20.89%
Stock Gain/Loss Last Year26.03%-19.21%
All market data accurate as of market close on Oct. 29, 2018.

Why You Might Pick Microsoft:

  • IBM had a decline in net income for 2016 and would have in 2017 even before factoring in the income tax hit for repatriating overseas cash.
  • Microsoft has been growing profits and revenue steadily, more than doubling its 2015 profits in 2016 and likely would have posted gains again in 2017 were it not for the large income tax hit for repatriating overseas cash.
  • Microsoft would appear to be the better value buy based on that growth, with a PEG ratio of 1.76 to IBM’s 9.42.

Read: Disney vs. Netflix — Will Netflix’s New Cash Infusion Help It Win the Content Wars?

Why You Might Pick IBM:

  • IBM is the better value buy based on earnings and revenue, with a PE ratio of 19.27 and PS ratio of 1.36 compared to 48.76 and 7.22 for Microsoft.
  • IBM has a much stronger dividend yield at 5.03 percent to 1.72 percent for Microsoft.
  • IBM has the stronger return on equity at 28.82 percent to Microsoft’s 19.45 percent, indicating it might be more efficient in leveraging assets.

Check Out: 21 Stock Perks That Will Blow Your Mind

The Final Word on Microsoft vs. IBM

Microsoft’s growth in revenue and profits is impressive, particularly for a company that’s as established as it is. However, although IBM has had its struggles, it’s currently trading at a much more attractive multiple to earnings and revenue and has a dividend yield in excess of 5 percent.

Read more about other major stock investments like Tesla vs. Ford.

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This article is produced for informational purposes only and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions carefully.