IBM vs. Microsoft: Which Cloud & AI Stock is Superior?

Over the past decade, IBM's (IBM -0.91%) stock price rose 10% while Microsoft's (MSFT -1.64%) stock surged 810%. IBM underperformed Microsoft by such a wide margin because it missed the seismic shift toward public cloud services, struggled to grow its revenue, and prioritized cost-cutting strategies and buybacks over smart investments. Microsoft grew a lot faster by shrewdly expanding its cloud, mobile, and AI ecosystems. 
 
Microsoft might still seem like a better buy than IBM right now, but the stock of the former actually underperformed the latter over the past 12 months. Microsoft's stock is up 24%, while IBM's stock advanced 36% as it impressed investors with its stabilizing growth. 
 
Could IBM continue to outperform Microsoft over the next year? Let’s delve into this question further. 
 
From 2012 to 2021, IBM's revenue fell from $102.9 billion to $57.4 billion due to soft demand for business software and IT services in addition to divestitures of its x86 server PC marketing cloud among other businesses, which hampered cloud expansion efforts amongst other things. 
 
However, since Arvind Krishna took over as CEO in April of last year, there has been some stability returning primarily through trimming non-core businesses, spinning off slow-growth managed IT services division Kyndryl (KD), and leveraging open-source software subsidiary Red Hat for developing more hybrid-cloud AI service offerings, thus resulting in an impressive revenue growth rate increase from negative figures previously experienced towards positive territory currently forecasted at around +6%. 
 
Analysts expect that between now and end-2026, annual compound growth rates (CAGR) will be approximately +4% and +7%, respectively, for revenues/earnings per share (EPS). While these figures may not sound overly exciting, they do indicate that the company has finally started turning a corner after years struggling against stiff competition from tech behemoths like Amazon, Microsoft, and Alphabet's Google. 
 
In contrast, Microsoft has been on a growth trajectory for the past decade. From fiscal 2014 to fiscal 2024 (which ended this June), its annual revenue grew at a CAGR of 11% from $86.8 billion to $245.1 billion as its EPS increased at a CAGR of 16%. 
 
Microsoft transformed productivity software into sticky cloud-based services, expanded Azure into the world's second-largest cloud infrastructure platform, turned Windows into a central hub for all these services while also rolling out more mobile versions of desktop apps, iOS, and Android devices, ramping up investments, OpenAI creator ChatGPT integrating generative AI tools into its own cloud-based offerings, launching more Surface devices, acquiring additional gaming companies, and supporting Xbox business growth. 
 
Analysts expect that between now and end-2027, annual compound growth rates (CAGR) will be approximately +14% and +15%, respectively, for revenues/earnings per share (EPS). However, despite impressive figures, stock is currently expensive trading at around x31 forward earnings, offering only a small dividend yield just below 1%. 
 
Therefore, in conclusion, even though both IBM and Microsoft are solid long-term investment choices, the latter could potentially underperform the former over the next year due to two factors: firstly, declining interest rates might attract investors towards cheaper high-yielding stocks such as IBM, and secondly, recent deceleration closely-watched Azure sales could cause the company lose someluster high-growth cloud/AI play, thus making it less appealing to prospective shareholders unless valuations cool off a bit more, which case then yes indeed would become a better buy again, but until then, it’s an advantage IBM!