Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: Apple vs. IBM

By Robert Izquierdo - Apr 15, 2020 at 8:45AM

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

When comparing these two well-known tech companies, one emerges as the clear winner.

Few technology companies are as iconic as Apple (AAPL 1.62%) and IBM (IBM -0.05%). Both experienced periods of market dominance as well as struggle, and in the fast-moving technology sector, it's easy for a company to fall behind.

For these two storied tech brands to continue, both must keep evolving. IBM is doing so in the business-to-business (B2B) sphere, while Apple is tackling business-to-consumer solutions. Let's look at the approach of each to determine which company is a better buy for investors.

A digital arrow hitting a target in the middle of a cloud of icons representing digital services and solutions like a mobile phone and computer.

Image source: Getty Images.

Apple's services success

Apple is known for its consumer products, particularly the iPhone and Mac computer. These two product lines generated over $63 billion of the company's $91.8 billion in revenue in Apple's fiscal 2020 first quarter ended Dec. 28, 2019. However, the company has built a substantial revenue stream from its digital services. In Q1, Apple earned $12.7 billion from its services division, a record high and a 17% year-over-year increase.

This division includes a large suite of services, many of them subscription-based, which generates recurring revenue for Apple. It encompasses the company's array of books, music, movies, and other digital content as well as iCloud, a cloud-storage service, and its AppleCare extended warranty program.

Also included is Apple News+, which launched last year as a premium complement to its free Apple News app, offering access to publications that require a subscription. Apple TV+, another new addition, is the company's answer to a streaming content service akin to Netflix.

But among its brightest service division stars is Apple's App Store and Apple Pay. The App Store is the company's digital marketplace, allowing consumers to buy apps from third-parties. In its 10-K filing, Apple stated the App Store was a key contributor to its services business enjoying year-over-year revenue growth.

Meanwhile, according to CEO Tim Cook, Apple Pay revenue and transactions more than doubled year-over-year. Apply Pay now generates over 15 billion transactions per year. The mobile payment service enables Apple to participate in the rising fintech space and will continue to grow as more consumers transition to paying with mobile phones.

IBM's cloud focus

IBM is poised for a resurgence after a lackluster 2019. The company has a new CEO, Arvind Krishna, who began his tenure on April 6. On that day, Krishna announced that the company will focus efforts on its hybrid cloud and artificial intelligence (AI) solutions for businesses. A hybrid cloud approach offers companies the cost savings and flexibility of public cloud solutions, along with the security and control of a private cloud infrastructure.

Krishna also wants to leverage IBM's acquisition of Red Hat to create a new technology standard for businesses. Red Hat was acquired for its cloud-computing technology built on Linux, an open-source operating system rivaling Microsoft's Windows. This acquisition allows IBM to improve its position against competitors in the red hot cloud-computing space. In fact, IBM's total cloud revenue for the fourth quarter that ended Dec. 31, 2019, was up 21% year-over-year.

However, its cloud offerings were one of the few bright spots as IBM's total revenue for the full year was down 3.1% compared to 2018. The company has struggled with revenue growth for the past few years, as this chart shows.

A chart showing IBM's annual revenue from 2016 through 2019 with the graph showing a slow decline from year to year.

Data by Ycharts.

Krishna was chosen to be the new CEO after leading IBM's cloud division. This part of the business is slowly growing to become a larger piece of IBM's revenue pie, accounting for $23.2 billion of the company's $77.1 billion in 2019. Krishna is just getting started, so it will be a few quarters before the impact of his decisions are reflected in IBM's financials.

The final verdict

Both Apple and IBM are solid companies, and as icing on the cake, both offer dividends. But when it comes to which is the better buy, Apple is the superior choice right now.

Apple's consumer products continue to sell well, and with its legions of loyal customers willing to upgrade their devices as technology evolves, this core part of its business is in a solid position to generate revenue for years to come. Apple only increases its strength through its expanding services division, which is growing well, and thanks to key offerings like Apple Pay, this tech giant is set to continue this growth.

Meanwhile, IBM is a company in transition. It's doubling down on its successful cloud-computing division, but it will be some time before the strategy bears fruit. Coupled with the fact that IBM competes with giants in the space like Microsoft and Amazon, and it will be challenging for IBM to grow market share. That's why Apple is the clear winner in this match-up.

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

Apple Inc. Stock Quote
Apple Inc.
AAPL
$138.93 (1.62%) $2.21
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$141.12 (-0.05%) $0.07

*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
311%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

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.