A consistent feature of the stock market is the manner in which participants are always presented with choices, ranging from the micro to the macro.
Among these endless options, the comparison between tech giants Google Inc. (GOOG) and IBM (IBM) stands out as a compelling exploration of two industry behemoths with distinct trajectories.
On one side, there’s Google, the epitome of innovation, known for its dominance in the digital realm, search engines, and cutting-edge technology. On the other, IBM, a stalwart in the tech industry, revered for its legacy and pioneering role in computing.
What makes this Google vs IBM matchup particularly fascinating is far beyond the hardware vs software dynamic, but is more related to disruption vs stability.
As we delve into the financial intricacies and strategic moves of Google vs IBM, this analysis aims to provide stock market participants with valuable insights, shedding light on the nuanced dynamics that define these top US stocks and their impact on their respective markets.
The AI Trophy
In the current times, the best question to ask when comparing two tech players is how well each is positioned to benefit from the AI explosion.
Thus, lets take a deeper look into this dimension in our assessment between Google vs IBM. This information is far more valuable than any other milestones on the companies’ earnings calendars.
In the AI space, IBM demonstrates a clear commitment to innovation, particularly in generative AI and quantum computing.
Recent news points to a strong alignment between IBM’s research and commercial arms, resulting in the rapid integration of advanced technologies into products like the evolving watsonx AI suite. Noteworthy applications span digital labor, customer care, and app modernization.
On the other hand, Google’s AI offering, Bard, has been gaining momentum, surpassing GPT-3 in output quality, and its free model makes it an appealing choice for users.
Google’s methodical approach, including integrated features like YouTube and Travel, positions Bard as a competitive force in the market. Moreover, Google’s commitment to fact-checking and a potential plugin ecosystem further strengthens its business position.
While IBM excels in strategic clarity, emphasizing governance and ethical AI, Google emerges as a strong contender with a focus on quality and user-friendly accessibility.
Given Google’s expansive size and diverse product ecosystem, it holds a distinct advantage in quickly capitalizing on AI, particularly with Bard. The breadth of Google’s offerings positions Bard within a comprehensive ecosystem, potentially facilitating rapid adoption and integration across various services.
In contrast, IBM, while excelling in AI development, may encounter challenges in achieving a similarly seamless and extensive integration due to differences in organizational structure and product portfolio.
Valuation Assessment
Right, so we’ve determined the potential of each of the tech giants, Google vs IBM, especially in terms of AI. Now let’s see how each is priced, which is the most important question to investors.
Google currently trades at a valuation multiple of 23 times free cash flow, below its 10-year average of 29.64. This places it among the more affordable big tech companies.
In comparison to the “Magnificent Seven,” including Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla, Alphabet boasts the lowest valuation multiples, suggesting it is reasonably priced, especially considering its stable growth.
However, caution is warranted, as valuation multiples may not fully capture differing growth rates among these tech giants.
On the other hand, IBM also appears undervalued relative to its peers, trading at a 2.6x EV/Sales ratio and a 14.5x Price-to-Earnings ratio for C2024, compared to the peer group’s 5.2x and 24.3x, respectively.
Once again, despite this seeming undervaluation, caution is advised, with a recommendation to stay on the sidelines due to the anticipated lack of material outperformance into 2024.
Wall Street analysts generally share a neutral sentiment, with 11 HOLD-rated, six BUY-rated, and one SELL-rated analyst covering IBM. The median price target is $145, with a minimal 1% potential upside, indicating limited room for growth in the near term.
Takeaway
In broad terms, Google vs IBM present different value propositions for investors. Alphabet, with its lower valuation multiples compared to other tech giants, appears relatively more attractively priced.
Its status as the lowest-valued stock among the “Magnificent Seven” suggests a potential for reasonable returns, especially for investors seeking stability in a tech portfolio. However, investors should bear in mind the nuances of growth rates not fully captured by valuation multiples.
Conversely, IBM seems undervalued relative to its peer group, but caution is advised. Despite the apparent discount, the recommendation to stay on the sidelines indicates a lack of confidence in substantial outperformance in the coming years.
Wall Street analysts also express a neutral sentiment, reflecting a degree of uncertainty in IBM’s future prospects.
Ultimately, the choice between Alphabet and IBM depends on an investor’s risk tolerance, investment goals, and belief in the growth trajectories of these tech giants.
Alphabet may appeal to those seeking a potentially undervalued leader in the tech space, while IBM might interest value investors cautious about the uncertainties surrounding its future performance.
As always, thorough research and consideration of individual investment strategies are crucial before making any financial decisions.
