In this article, I evaluated two tech stocks, Snowflake Inc. (SNOW) and International Business Machines Corporation (IBM), to analyze which stock to buy, hold, or sell. After thoroughly evaluating these stocks, I think IBM might be a superior choice for the reasons discussed in this article.
The IT Services market in the United States has been experiencing significant growth in recent years, driven by various factors such as technological advancements, increasing demand for cloud computing, and the need for digital transformation across industries. Revenue in the IT Services market is expected to grow at a CAGR of 6.2% until 2028.
Furthermore, cloud services are gaining popularity in developing nations as businesses seek to enhance their digital operations. Increased government efforts to safeguard data integrity and security further drive this trend. Also, large businesses are rapidly adopting cloud services due to on-demand availability.
Thus, the global cloud computing market is expected to expand at a CAGR of 14.1% from 2023 to 2030.
SNOW gained 13.5% over the past month compared to IBM’s 14.4% gain. The stock has gained 49.4% over the past nine months compared to IBM’s 39% gain.
However, here are the reasons why I think IBM might perform better in the near term:
Recent Developments
On December 11, 2023, SNOW had received FedRAMP High Authorization on the AWS GovCloud (US-West and US-East Regions).
Conversely, On February 6, 2024, IBM announced IBM LinuxONE 4 Express, extending the latest performance, security and AI capabilities of LinuxONE to small and medium sized businesses and within new data center environments.
The pre-configured rack mount system is designed to offer cost savings and to remove client guess work when spinning up workloads quickly and getting started with the platform to address new and traditional use cases such as digital assets, medical imaging with AI, and workload consolidation.
Recent Financial Results
For the third quarter that ended October 31, 2023, SNOW’ revenues rose 32% year-over-year to $734.17 million. Its non-GAAP gross profit rose 75% year-over-year to $549.93 million. However, net loss attributable to SNOW increased 6.6% year-over-year to $214.25 million and net loss per share increased 3.2% year-over-year to $0.65.
On the contrary, for the third quarter that ended September 30, IBM’s total revenue grew 4.6% year-over-year to $14.75 billion. Its gross profit increased 8% from the year-ago value to $8.02 billion. Also, the company’s net income came in at $1.70 billion and $1.86 per share, compared to a net loss of $3.20 billion and $3.55 in the prior year’s quarter, respectively.
Past And Expected Financial Performance
Over the past three years, SNOW’s revenue increased at a 75% CAGR. Analysts expect SNOW’s revenue to increase by 35.2% in the year ended January 2024 and 29% in the first quarter ended January 2024. Its EPS is expected to increase 219.1% in the year ended January 2024 and 25.9% over the fiscal fourth quarter (ended January 2024).
Conversely, IBM’s revenue has increased at a CAGR of 3.9% over the past three years. Its revenue is expected to increase 3.1% in the fiscal year ending December 2024 and 2.3% in the first quarter ending March 2024. Its EPS is expected to increase 4.8% in the year ending December 2024 and 15.7% in the first quarter ending March 2024.
Valuation
SNOW’s forward EV/EBITDA multiple of 225.64 is higher than IBM’s 13.58. DIS’s forward EV/Sales multiple of 24.78x is higher than IBM’s 3.38x.
Thus, IBM is more affordable.
Profitability
SNOW’s trailing-12-month gross profit margin of negative 67.1% is lower than IBM’s 55.45%. In addition, SNOW’s trailing-12-month asset turnover ratio of 0.36x is lower than IBM’s 0.47x.
Thus, IBM is more profitable.
POWR Ratings
SNOW has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, IBM has an overall rating of B, translating to Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. SNOW has a C grade in Quality. Its trailing-12-month gross profit margin of 67.09% is 36.8% higher than the industry average of 49.06%. However, its trailing-12-month EBIT margin of negative 39.94% is lower than the 4.49% industry average.
On the other hand, IBM has a B grade in Quality. Its trailing-12-month EBIT margin of 15.17% is 237.9% higher than the industry average of 4.49%. Its trailing-12-month gross profit margin of 55.45% is 13% higher than the 49.06% industry average.
Among the 77 stocks in the in the Technology - Services industry, SNOW is ranked #62, while IBM is ranked #14.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Value, Stability, and Sentiment. Get all SNOW ratings here. Click here to view IBM ratings.
The Winner
The technology industry is seeing steady gains as a result of rising demand for cloud computing services and digitization. Industry players such as SNOW and IBM are well-positioned to benefit from these industry tailwinds.
IBM’s higher profitability and lower valuation makes it the better buy here.
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 Producers industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
IBM shares were trading at $185.91 per share on Friday afternoon, up $1.55 (+0.84%). Year-to-date, IBM has gained 14.71%, versus a 5.28% 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.
SNOW vs. IBM - Tech Buy, Hold, or Sell? StockNews.com
