Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: International Business Machines (IBM) vs. Oracle (ORCL)

By Dan Caplinger - May 8, 2018 at 9:26PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Which stock will win this battle of the tech veterans?

The technology industry has changed dramatically over the decades, but many giants from previous eras are still around, playing important roles. International Business Machines (IBM -0.05%) and Oracle (ORCL 1.43%) 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.

White coffee mug with blue IBM logo on it under an espresso machine.

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$141.12 (-0.05%) $0.07
Oracle Corporation Stock Quote
Oracle Corporation
ORCL
$70.87 (1.43%) $1.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.