Why Microsoft is a better artificial intelligence stock than IBM

Leading technology companies have mostly reported positive quarterly results, riding the strong adoption of their AI-powered offerings. This uptrend is expected to continue through the rest of the year and beyond. Microsoft Corp. (NASDAQ: MSFT) and International Business Machines Corporation (NYSE: IBM) are among the top AI players, helping businesses harness the power of the technology.

Microsoft’s cloud businesses have registered double-digit revenue growth so far in fiscal 2024, supported by aggressive AI integration across the board. In the most recent quarter which ended on March 31, 2024, Microsoft Office Products & Cloud Services revenue increased sharply year-over-year, and Server Products and Cloud Services revenue rose an impressive 24%. As a result, total revenues grew 17% annually to about $62 billion. At $22 billion or $2.94 per share, Q3 net income was up 20% from the prior-year period. On the other hand, device revenues, mainly comprising the company’s Surface computers, declined 17% amid continued slowdown in demand. Another weak area is the Xbox gaming console — 31% fall in revenue — though the content side of the gaming division saw strong growth aided by Activision titles.

User-Friendly

Microsoft has integrated AI across its existing and new services, both in the commercial and consumer divisions, resulting in an all-new user experience. AI tools have made MS applications more user-friendly and common tasks easier, driving broader adoption, thanks to the prevalence of its products in the market. Customers with relatively smaller projects would find Microsoft’s subscription-based model cost-effective. By infusing AI across all layers of its tech stack, Microsoft has a more practical revenue model allowing it to efficiently capture value from AI offerings.

The company’s stock grew at an accelerated pace throughout last year, regularly setting new records. It entered 2024 on a high note and at one point Microsoft surpassed Apple as the world’s most valuable company. The upswing continued and the stock crossed the $450 mark for the first time and reached a new high this week. The market is buoyed by the company’s groundbreaking partnership with OpenAI and the integration of ChatGTP into its business. Going by the management’s innovation-focused growth strategy, the stock has more room for growth. MSFT looks like a compelling investment for the long term, with the potential to generate strong returns.  

Slow Growth

In the case of IBM, the tech giant’s cloud-based Consulting and Software segments — which together account for three-fourths of total revenues — delivered stable performance in recent quarters. Meanwhile, top-line growth was restricted by weakness in other areas, mainly the Infrastructure business that comprises servers, software, cloud, and security services. The effects of AI integration are yet to be reflected in the infrastructure segment.

In Q1 2024, revenues edged up to $14.5 billion even as an increase in Software revenues was partially offset by softness in the other business divisions. Adjusted profit jumped 24% year-over-year to $1.68 per share in the first quarter. Gross profit margin increased by 80 basis points year-over-year to 53.5%, underscoring the company’s high operational efficiency.

During the quarter, the company signed an agreement to acquire HashiCorp for about $6.4 billion, extending Red Hat’s capabilities and strengthening its footprint in the hybrid cloud market. After ending the quarter with a healthy operating cash flow of $4.2 billion, the company looks well-positioned to executive its growth strategy.

Customization

IBM has a long track record of conducting research and development in artificial intelligence technology. Its AI solutions, including the innovative Watson Suite, play a key role in increasing user engagement and expanding customer base. The specialties include industry-specific offerings and options for extensive customization, which make the products ideal for large-scale projects. However, IBM’s AI initiatives are yet to translate into revenues in a meaningful way.

While IBM’s stock had a positive start to 2024 and climbed to a 10-year high, its performance has not been very impressive after that. It suffered a selloff after the release of Q4 earnings and traded sideways since then. Meanwhile, the shares have gained about 24% in the past twelve months. When it comes to investing in IBM, the absence of any indicators of the stock’s revival from the current lows calls for caution.