International Business Machines Corp. (IBM) and Apple, Inc. (AAPL) are two completely different companies. IBM is an IT company with a diverse range of software and services aimed at enterprise customers. And while Apple also serves enterprise customers, it is mostly consumer-focused, with hardware and also software.
Still, many investors might be trying to decide between the two as an investment, given that both stocks are well off their respective highs and are big buyback and dividend opportunities.
So, if you had to choose just one, which would it be? Apple stock or IBM stock?
AAPL and IBM both trade a bit over 9x next year’s expected earnings. Looking ahead to the coming year, both companies are expected to see a mid-single-digit decline in revenue compared to last year.
This decline in revenue coupled with the similar P/E multiples is why some investors might choose one or the other, but not both stocks.
With that said, the idea that IBM and AAPL are on the same level operationally is just an illusion, and the fact that IBM stock trades at the same multiple simply illustrates the great degree of value that’s present in Apple stock.
Look Beyond This Year for AAPL, IBM Stock
For one, the growth outlook for this year is very misleading because IBM is being compared to a previous year where revenue declined 12%. If IBM meets analyst expectations for this year, then its full year revenue would have fallen more than 16% from 2014. Altogether, IBM’s expected $78 billion in revenue this year represents a total decline of $25 billion over the last four years.
While IBM has had about a quarter of its annual revenue wiped out in just four years’ time, Apple’s business has grown 33%, or more than $14 billion annually. Furthermore, Apple may have its first year of revenue loss during the iPhone era in 2016, but that’s only because of how good of a year it had in 2015.
Apple’s full-year expectation for $227.4 billion in revenue for 2016 represents a 24.4% increase from its sales in 2014. So on a compound annualized basis, AAPL is still growing at a very impressive rate.
Not to mention, Apple’s impressive performance is expected to continue beyond 2016, with analysts already predicting growth of 6% next year. Meanwhile, IBM is expected to produce its first year of flat growth in 2017. That would follow five years of consistent and significant losses.
The Best Choice Is Obviously Apple Stock
When you consider the above, Apple stock looks like the value investment of the century while trading at the same multiple as IBM stock.
Granted, IBM’s dividend of 4% is about double that of AAPL. Still, Apple stock is deserving of a far higher multiple than IBM, much like Microsoft Corporation (MSFT) at its multiple to next year’s earnings of 17.
As a result, one must conclude that long-term, AAPL stock value will return much larger gains than the 2% dividend advantage that investors can obtain by owning IBM stock.
In retrospect, AAPL is still a growth company, despite 2016’s bump in the road, and the fact that its stock has fallen 27% from its high, and now trades at a similar premium as IBM stock is a blessing in disguise.
As of this writing, Brian Nichols owned shares of AAPL.
