Companies are concentrating increasingly on digital transformation projects, which call for IT services for technological upgrades. The growing demand for IT services for implementation is also driven by the widespread adoption of cloud computing, which offers benefits like scalability, cost-effectiveness, and automatic updates. Therefore, the global IT services market is expected to grow at a CAGR of 7.1% by 2034.
Moreover, the rise in affordable smartphones and widespread internet connectivity has boosted demand for mobile applications. This has created a lucrative opportunity for app developers and increased demand for development software. Hence, the global application development software market is expected to grow at a CAGR of 20.7% by 2033.
Against this backdrop, let’s compare two established tech stocks, which might be at the forefront of this transformation, to analyze which tech offers better value: International Business Machines Corporation (IBM) and Oracle Corporation (ORCL).
The Case for International Business Machines Corporation Stock
With a $176.99 trillion market cap, International Business Machines Corporation (IBM) and its subsidiaries provide integrated solutions and services worldwide. The company operates through the Software, Consulting, Infrastructure, and Financing segments.
On July 2, 2024, IBM and HCLTech announced the creation of a Generative AI Center of Excellence, which will use IBM’s Watson AI and data platform to help enterprises build custom AI applications and modernize legacy systems.
Stephen Smith, General Manager, Service Partners, at IBM Ecosystem, said, “Through this Center of Excellence, we plan to empower our joint clients to rapidly explore, experiment and engineer generative AI solutions with watsonx that are designed to meet their current business challenges.”
On July 1, 2024, IBM announced the completion of its acquisition of StreamSets and webMethods from Software AG. This acquisition enhances IBM's automation, data, and AI portfolios with new data ingestion and integration capabilities. This acquisition aims to provide clients with a comprehensive application and data integration platform to drive innovation and AI readiness.
IBM’s stock has gained 33.3% over the past year and 32.8% over the past nine months to close the last trading session at $192.14.
IBM’s forward EV/EBITDA of 14.39x is 2% lower than the industry average of 14.68x. Its forward Price/Sales multiple of 2.80 is 5.7% lower than the industry average of 2.97.
IBM’s total revenues for the second quarter, which ended June 30, 2024, rose 1.9% year-over-year to $15.77 billion. Its non-GAAP gross profit increased 5.4% from the year-ago value to $9.12 billion. Also, the company’s non-GAAP income from continuing operations came in at $2.28 billion and $2.43 per share, up 14% and 11.5% over the prior-year quarter, respectively.
Analysts expect IBM’s revenue for the third quarter (ending September 2024) to increase 2.1% year-over-year to $15.06 billion. Likewise, its EPS for the same quarter is projected to grow 1.1% year-over-year to $2.22. Moreover, the company has topped consensus revenue and EPS estimates in each of the trailing four quarters, which is excellent.
IBM’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a B grade for Quality. IBM is ranked #12 out of 76 stocks in the Technology - Services industry.
In addition to the POWR Ratings I’ve just highlighted, you can see IBM’s ratings for Growth, Momentum, Stability, Sentiment, and Value here.
The Case for Oracle Corporation Stock
Valued at $384.31 billion by market cap, Oracle Corporation (ORCL) offers products and services that address enterprise information technology environments worldwide. The company provides cloud software applications, cloud-based industry solutions, application licenses, infrastructure technologies, databases, Java, middleware, hardware products, and consulting and customer services.
ORCL’s stock has gained 34.4% over the past nine months to close the last trading session at $139.45. Over the past year, the stock has surged 37.1%.
On July 11, 2024, ORCL announced the general availability of Exadata Exascale, an intelligent data architecture for the cloud that provides extreme performance for all Oracle Database workloads, including AI vector processing, analytics, and transactions at any scale.
Exadata Exascale dramatically reduces costs for organizations of any size to take advantage of Oracle Exadata's unique built-in performance, reliability, availability, and security capabilities.
ORCL’s forward EV/EBIT of 18.33x is 10.8% lower than the industry average of 20.54x. However, its forward Price/Sales multiple of 6.64 is 123.4% higher than the industry average of 2.97x.
During the fourth quarter, which ended May 31, 2024, ORCL’s total revenue increased 3% year-over-year to $14.29 billion. Its operating income came in at $4.69 billion, up 13% from the prior year’s quarter. However, its net income declined 5% from the year-ago value to $3.14 billion, and earnings per share plunged 6.7% year-over-year to $1.11.
Street expects ORCL’s revenue for the first quarter (ending August 2024) to increase 6.3% year-over-year to $13.24 billion. The company’s EPS is estimated to grow 12% year-over-year to $1.33 for the same quarter. However, the company has failed to surpass consensus revenue estimates in each of the trailing four quarters.
ORCL’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, translating to Neutral in our proprietary rating system.
ORCL has a C grade for Growth, Value, Stability, and Momentum. It is ranked #52 among 134 stocks in the Software - Application industry.
Click here for the additional POWR Ratings for ORCL (Quality and Sentiment).
IBM (IBM) vs. Oracle (ORCL): Which Legacy Tech Stock Offers Better Value?
The tech industry’s prospects appear promising. Companies are increasingly focusing on digital transformation projects, requiring IT services for security solutions, software deployment, and infrastructure upgrades. Also, as organizations advance their digital transformation efforts, the need for efficient and scalable application development software becomes more evident.
Leading tech companies IBM and ORCL stand to capitalize on the optimistic industry outlook. However, IBM’s strong financial performance, lower valuation and promising near-term outlook favor it as the better tech stock pick.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Technology - Services industry here and the Software - Application industry here.
What To Do Next?
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IBM shares were trading at $189.31 per share on Thursday afternoon, down $2.83 (-1.47%). Year-to-date, IBM has gained 17.97%, versus a 14.63% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
IBM (IBM) vs. Oracle (ORCL): Which Legacy Tech Stock Offers Better Value? StockNews.com
