Is Microsoft’s Stock A Better Pick Over This Tech Company?

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International Business Machines

We think that Microsoft’s stock (NASDAQ: MSFT) currently is a better pick compared to IBM’s stock (NYSE: IBM). Microsoft’s stock trades at about 14.6x trailing revenues, compared to around 1.5x for IBM. Does this gap in the companies’ valuations make sense? We believe so. Microsoft has recorded revenue growth despite the pandemic and a better growth in operating margin over the last three years. Microsoft has also seen stronger revenue growth in the last twelve months. However, there is more to the comparison, which makes Microsoft a better bet than IBM at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard IBM vs Microsoft: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Microsoft Wins On Revenue Growth

With Microsoft’s fiscal year ending in June, its ongoing FY is 2022, while IBM’s fiscal year ends in December, its ongoing FY is 2021. If compared on the basis of the past three years, Microsoft trumps IBM in revenue growth. Microsoft’s revenue has gained by rate 15.1% over the last three FY’s. On a comparable basis, IBM’s revenue fell by the rate of 2.4% over the last three FY’s. Further, for the most recent quarter (Q1’22 for Microsoft and Q3’21 for IBM), Microsoft’s revenues jumped 22% YoY, while IBM’s rose by 0.3%.

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2. Microsoft Clear Winner On Margins

Microsoft’s EBIT margins were 42.1% in the last twelve month period, a positive 4.6% change compared to last three FY’s. In comparison, IBM’s EBIT margins were 8.4% in the last twelve month period a negative 4.3% change compared to last three FY’s. Microsoft also has a better FCF margin at 46.5% compared to 21.6% of IBM.

Risk

Microsoft has a better debt position, with debt as % of equity of 2.1% vs 49.0% for IBM. Microsoft also has more cash cushion, with cash as % of assets of 38.9% vs 5.2% for IBM.

The Net of It All

While Microsoft’s trailing revenue multiple stands higher than that of IBM, it has seen stellar growth in revenues and operating margins compared to IBM. A consistent rise in revenues and EBIT Margin makes Microsoft more attractive, despite a higher P/S ratio of 14.6x vs IBM’s 1.5x. We believe Microsoft has the potential to keep riding ahead, supported by strong financials, and the gap in valuation could further widen over time. As such, we believe that Microsoft is currently a better buying opportunity compared to IBM stock.

While MSFT stock is likely to move higher in the near term, there are several peers in its sector that look like a Better Bet Than MSFT Stock. Also, Microsoft Peer Comparisons summarizes how the company fares against peers on metrics that matter.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Dec 2021
MTD [1]
2021
YTD [1]
2017-21
Total [2]
IBM Return 9% 1% -23%
MSFT Return -6% 44% 415%
S&P 500 Return -3% 21% 104%
Trefis MS Portfolio Return -1% 42% 283%

[1] Month-to-date and year-to-date as of 12/21/2021
[2] Cumulative total returns since 2017

 

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