Better Buy: International Business Machines (IBM) vs. Oracle (ORCL)
The technology industry has changed dramatically over the decades, but many giants from previous eras are still around, playing important roles. International Business Machines (NYSE: IBM) and Oracle (NYSE: ORCL) have both had to take critical looks at their businesses to identify new areas into which they could successfully expand, or else run the risk of becoming obsolete.
From an investment standpoint, IBM has struggled for years, while Oracle has shown clearer signs of having successfully evolved toward a more sustainable business model. Yet the question for investors is which of these tech veterans makes the better stock buy today. Comparing them on some common metrics, and considering the potential rewards each could reap from a full turnaround, should shed some light on which deserves a more prominent place in your portfolio.
Image source: IBM.
Stock performance and valuation
Neither IBM nor Oracle has delivered a particularly impressive performance for shareholders in the past 12 months. Oracle's stock price is just above the break-even mark, and that's quite a bit better than the nearly 8% dip IBM shares have taken over the same time frame.
When it comes to earnings-based measures, investors need to avoid giving companies too much credit or blame for year-over-year performance shifts currently. Most companies' fiscal stats have been dramatically impacted by the changes to tax laws that took effect at the beginning of 2018. One the one hand, the benefits of lower corporate taxes rates are creating a host of artificially enhanced comparisons; on the other, large one-time tax bills on years of foreign earnings that are now being repatriated (at a low 15.5% rate) are skewing some multinational players' numbers to look worse than they otherwise would.
IBM's current price/earnings ratio of 23 compares favorably to Oracle's ratio of more than 50. But when you look at forward earnings projections rather than trailing P/E, the comparison gets better -- and closer. IBM's valuation still looks cheaper at 10 times forward earnings, but Oracle's ratio of less than 14 is also attractive relative to the broader stock market.
Dividends
Tech stocks aren't generally known for their dividends, but IBM and Oracle both pay their shareholders well. That said, IBM's yield of about 3.6% is more than double the 1.7% that Oracle stock yields right now.
IBM has also done a better job than Oracle of delivering consistent dividend growth over the long run. For 23 straight years, Big Blue has boosted its payout annually, most recently with a 5% boost this month. Oracle's streak of nine years of dividend increases is more modest, but it's been more aggressive lately, with a 27% payout boost last spring.
Growth prospects and risks
Both companies are working hard to keep up with the rapid pace of innovation in technology. For years, IBM's year-over-year sales declined quarter after quarter; only recently has it managed to reverse the trend and push revenue higher. Big Blue's aggressive moves into the areas it has determined will be its "strategic imperatives" -- among them, cloud computing, data analytics, quantum computing, and artificial intelligence -- have had a degree of success. The company has also seen good results from its latest efforts to develop blockchain technology, as well as addressing the growing need for cybersecurity products and services. Yet some revenue gains have come from the release of a newly updated mainframe system. After this upgrade cycle peaks, IBM could once again face some of the same pressures that have dragged its top line down in the past.
Oracle, meanwhile, has done a better job of reorienting its business to the cloud, but the fiscal third-quarter results it reported in March revealed that strategy has its limits.
The Q3 numbers showed that the software company's efforts to compete with some of the strongest players in cloud-computing services had mixed success. Its new cloud infrastructure and autonomous database products helped promote solid growth for the division. Yet Oracle said its revenue will rise only because of favorable currency impacts in 2018 -- it projects adjusted sales will land in a range from flat to down 2% for the year. Investors were particularly unhappy about the company's much slower cloud revenue growth, as it suggests that this highest-growth segment of Oracle's business could stall out.
While it faces similar growth challenges, IBM's lower valuation and higher dividend make it a better pick right now. Nevertheless, both of these companies face major hurdles that will require decisive action to overcome, if they hope to recover some of their former glory.
More From The Motley Fool
Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of Oracle. The Motley Fool is short shares of IBM and has the following options: short June 2018 $52 calls on Oracle and long January 2020 $30 calls on Oracle. The Motley Fool has a disclosure policy.
