When navigating investment decisions, comparing stocks with similar scales but different sectors can offer valuable insights. In this analysis, we delve into a comparison between International Business Machines Corporation (NYSE: IBM), a computing industry giant, and Delta Air Lines (NYSE: DAL), a leading player in the airline sector. Both companies boast revenues in the $60-62 billion range, yet they operate in vastly different markets with unique growth dynamics, profitability profiles, and financial standings. While both are significant entities in their respective industries, the question arises: Which stock presents a more compelling investment opportunity for the next three years?
This article provides a detailed comparison, examining historical stock performance, revenue growth trajectories, profitability, and financial risk to determine which of these NYSE listed stocks, IBM or Delta Air Lines, may be a better addition to your investment portfolio.
Historical Stock Performance: IBM vs. DAL
Historically, IBM stock has demonstrated stronger gains compared to DAL. From early January 2021 to the present, IBM shares have surged by 130%, escalating from approximately $100 to $230. In contrast, Delta Air Lines stock witnessed a more modest increase of 25% during the same period, moving from $40 to $50. This divergence is further highlighted when juxtaposed against the S&P 500 index, which itself grew by 50% over these four years.
Alternative text: Illustration comparing IBM (NYSE: IBM) stock performance on a laptop screen, highlighting its growth trajectory against market benchmarks.
Analyzing year-on-year returns further illustrates this point. IBM delivered positive returns each of the last three years: 16% in 2021, 11% in 2022, and 22% in 2023. However, IBM underperformed the S&P 500 in both 2021 and 2023. Delta Air Lines also underperformed the S&P 500 in 2021 and 2023, with returns of -3% in 2021, -16% in 2022, and 23% in 2023. This underscores the challenge of consistently outperforming the broader market, even for sector heavyweights.
Revenue Growth: Delta Air Lines Outpaces IBM
Examining revenue growth, Delta Air Lines demonstrates a more robust expansion rate compared to IBM. Delta’s revenue surged at an impressive average annual rate of 53% from $17.1 billion in 2020 to $58 billion in 2023. Conversely, IBM experienced a more modest average annual revenue growth rate of 4%, increasing from $55.2 billion in 2020 to $61.9 billion in 2023.
IBM’s revenue growth is primarily fueled by its software division, particularly through strong sales of Red Hat products and Data & AI solutions. The acquisition of Red Hat in 2019 has been pivotal, providing IBM with a robust portfolio in open-source technology and hybrid cloud platforms. IBM’s consulting arm also contributes significantly, navigating a challenging IT spending landscape effectively.
While Artificial Intelligence (AI) has not yet been a major revenue driver for IBM, this is poised to change. IBM is strategically positioning itself to capitalize on the burgeoning demand for enterprise AI solutions. The launch of Watsonx, IBM’s core AI platform, is designed to enable businesses to train, customize, and deploy AI models. Early indicators suggest strong client interest and growth in IBM’s AI-related business ventures.
Delta Air Lines’ revenue surge is largely attributed to the recovery in travel demand post-pandemic. The airline has expanded its capacity and seen yields increase. Available seat miles (ASM) for Delta doubled from 134 billion in 2020 to 272 billion in 2023, while passenger yield rose by 20% to $0.21. Despite this recovery, Delta’s 2023 ASM remains slightly below pre-pandemic levels of 275 billion in 2019, indicating ongoing growth potential.
However, the airline industry faced headwinds at the start of 2024. Delta’s Q2 2024 revenue, although up 5% year-over-year, showed a 3% decrease in passenger revenue per available seat mile due to yield pressures and a slight decline in load factor. Looking ahead, revenue growth expectations diverge, with IBM projected to grow at a mid-single-digit rate and Delta at a low single-digit rate over the next three years.
Profitability: IBM Shows Stronger Margins
In terms of profitability, IBM exhibits stronger operating margins. IBM’s operating margin expanded significantly from 8.4% in 2020 to 15.2% in 2023. Delta Air Lines also improved its operating margin from -24.9% to 9.1% over the same period, marking a significant turnaround from pandemic lows.
IBM’s profitability enhancement is driven by strategic cost-cutting measures, with plans to reduce costs by $3 billion in 2024 through headcount reductions and automation. Delta, on the other hand, faces margin pressures from rising operational costs, particularly fuel prices. Jet fuel prices remain volatile, influenced by geopolitical factors, impacting airline profitability. Over the last twelve months, IBM’s operating margin of 15% surpasses Delta’s 10%, highlighting IBM’s current profitability advantage.
Financial Risk: IBM Presents Lower Risk Profile
Assessing financial risk reveals IBM as the less risky investment. IBM’s debt-to-equity ratio stands at a modest 28%, significantly lower than Delta’s 80%. Furthermore, IBM holds a higher percentage of cash relative to assets at 10%, compared to Delta’s 6%. These metrics indicate that IBM possesses a more robust financial position with lower leverage and stronger liquidity.
Investment Outlook and Valuation: Weighing IBM (NYSE: IBM) and DAL
While Delta Air Lines has demonstrated superior revenue growth, IBM showcases stronger profitability and lower financial risk. Considering future prospects and valuation, Delta appears to be potentially undervalued relative to IBM.
Currently, IBM stock trades at a price-to-sales (P/S) ratio of 3.4x trailing revenues, significantly above its 5-year average of 1.9x. Conversely, DAL stock trades at approximately 0.5x revenues, below its 5-year average P/S ratio of 0.8x. Our valuation estimates suggest IBM’s fair value to be around $202 per share, approximately 12% below its current market price of $230.
Given these valuation metrics and growth prospects, Delta Air Lines may offer more compelling returns than IBM over the next three years, despite IBM’s historical stock outperformance and current profitability advantage. Investors seeking growth at a reasonable price might find DAL more attractive at current levels, while those prioritizing stability and established profitability may lean towards IBM.
Ultimately, the optimal choice between NYSE: IBM and DAL depends on individual investment objectives, risk tolerance, and investment horizon. Further research into both companies and broader market conditions is recommended before making any investment decisions.
