One of the major secular trends in the past year has been artificial intelligence (AI). The AI market is projected to reach $305.9 billion in 2024, with further growth expected to $738.8 billion by 2030.
This market expansion provides sustained growth opportunities for companies involved in AI technology, including industry veterans International Business Machines (NYSE: IBM) and Microsoft (NASDAQ: MSFT). The increasing demand for their AI products has driven up the stock prices of both companies over the last year.
IBM’s shares hit a low of $120.55 in May of last year before climbing to a high of $196.90 this year. Similarly, Microsoft’s shares rose from a low of $245.61 in March to a peak of $420.82 on Feb. 9.
But if you had to pick just one to invest in, which would you choose?
Reasons to invest in IBM
IBM has been involved in AI research since the 1950s, much earlier than Microsoft’s founding in 1975. The company’s latest AI platform, watsonx, launched in the third quarter of last year and saw rapid adoption.
In the fourth quarter, IBM’s watsonx business doubled compared to the previous quarter, contributing to a 4% year-over-year revenue increase to $17.4 billion in Q4.
IBM’s data and AI division experienced 5% year-over-year revenue growth in 2023, driven by successes like helping Sevilla Fútbol Club analyze soccer players using watsonx. Additionally, IBM boasts a team of over 20,000 AI consultants to assist clients with their AI strategies.
CEO Arvind Krishna highlighted IBM’s unique position as the only provider offering both a technology stack and consulting services for generative AI. The consulting division saw Q4 revenue grow 6% year over year to $5 billion.
The case for Microsoft
Microsoft’s CEO, Satya Nadella, recognizes AI as the next major computing wave and is positioning the company as a leader in the AI space.
Microsoft has made significant investments in AI, such as acquiring OpenAI, the creator of ChatGPT, and integrating AI technology across its product lineup. This strategic move has led to revenue growth, with a notable example being the 30% quarter-over-quarter increase in GitHub Copilot subscribers in Q2.
Microsoft’s AI initiatives have also contributed to an 18% revenue increase in Q2 to $62 billion. The company’s Azure platform, a key player in its cloud computing shift, experienced a 30% year-over-year increase in Q2 sales.
Choosing between Microsoft and IBM
While both Microsoft and IBM offer strong AI solutions, it may be beneficial to invest in both companies. However, when comparing the two, there are additional factors to consider.
IBM currently offers a more attractive dividend yield of over 3% compared to Microsoft’s less than 1% yield. Additionally, IBM’s Q4 free cash flow of $6.1 billion was an improvement over the previous year, indicating the company’s financial stability to support dividend payments.
On the other hand, Microsoft’s diversified businesses, such as digital advertising and Windows, provide income diversification. For instance, the company’s video games division saw a 61% revenue increase in Q2 due to its acquisition of Activision Blizzard.
Considering these factors along with Microsoft’s AI successes, Microsoft emerges as the preferred investment option over IBM. Given the recent dip in Microsoft’s stock price from its 52-week high, now may be a good opportunity to purchase shares.
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Robert Izquierdo holds positions in International Business Machines and Microsoft. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends International Business Machines and recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Better AI Stock: Microsoft vs. IBM was originally published by The Motley Fool
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