Choosing the right stock for investment often involves comparing companies across various sectors and financial metrics. In this analysis, we delve into a comparison between International Business Machines Corporation (NYSE: IBM) and Delta Air Lines (NYSE: DAL), two prominent companies with approximately similar revenue scales but operating in distinctly different industries. While IBM stands as a technology and consulting giant, Delta Air Lines is a leading player in the airline industry. Although both companies generate revenues in the $60-62 billion range, their growth trajectories, profitability, and financial health present a contrasting investment landscape. This article provides a detailed comparison to determine which stock might offer better returns over the next three years.
IBM Stock vs. Delta: Historical Stock Performance
When evaluating investment potential, past stock performance offers valuable insights. Historically, IBM stock has demonstrated stronger gains compared to Delta Air Lines over a roughly four-year period from early January 2021 to the present. IBM (NYSE: IBM) stock surged by 130%, climbing from around $100 to $230, while Delta Air Lines (NYSE: DAL) stock saw a more modest increase of 25%, moving from $40 to $50 during the same timeframe. In contrast, the S&P 500 index registered a 50% rise during this period.
Notably, IBM has shown consistent annual growth over the past three years, a feat not commonly observed across the market. However, this consistent growth didn’t consistently outperform the broader market. IBM’s annual returns were 16% in 2021, 11% in 2022, and 22% in 2023. In comparison, the S&P 500’s returns were 27% in 2021, -19% in 2022, and 24% in 2023, indicating IBM underperformed the S&P 500 in 2021 and 2023. Similarly, Delta Air Lines’ stock returns were -3% in 2021, -16% in 2022, and 23% in 2023, also underperforming the S&P 500 in 2021 and 2023.
Revenue Growth: Delta Air Lines Takes the Lead
Analyzing revenue growth reveals a significant difference between IBM and Delta Air Lines. IBM’s revenue has grown at an average annual rate of 4%, increasing from $55.2 billion in 2020 to $61.9 billion in 2023. Delta Air Lines, however, has experienced a much more rapid average revenue growth rate of 53% over the same period, soaring from $17.1 billion to $58 billion.
IBM’s revenue growth is primarily fueled by its software division, particularly strong sales of Red Hat products and its Data & AI solutions. The acquisition of Red Hat in 2019 has proven to be a strategic move, driving growth through its open-source technology portfolio, hybrid cloud platform, and extensive developer community. IBM’s consulting business has also shown resilience, performing well despite fluctuations in IT spending. Looking ahead, Artificial Intelligence (AI) is expected to become a more significant revenue driver for IBM. The company’s Watsonx platform, launched last year, is designed to enable enterprise clients to develop and deploy customized AI models. IBM has reported increasing client demand for AI solutions, with substantial growth in its Watsonx and generative AI business.
Delta Air Lines’ revenue surge is largely attributed to the rebound in travel demand following the pandemic. The airline has expanded its capacity and increased average yields in recent years. Delta’s Available Seat Miles (ASMs) doubled from 134 billion in 2020 to 272 billion in 2023, while passenger yield rose by 20% from $0.18 to $0.21. While 2020 was a significantly depressed year for the airline industry due to travel restrictions, Delta’s 2023 ASM is still slightly below the 275 billion seen in 2019, pre-pandemic levels, indicating continued recovery and growth potential. However, the airline industry in the U.S. faced headwinds at the beginning of 2024. In the second quarter of 2024, Delta’s adjusted revenue of $15.45 billion represented a 5% year-over-year increase, driven by an 8% rise in total ASMs. However, passenger revenue per available seat mile decreased by 3% due to lower yield and a slight decline in load factor. Moving forward, revenue growth expectations differ for both companies. IBM’s revenue is projected to grow at a mid-single-digit average annual rate over the next three years, whereas Delta’s revenue is expected to grow at a low single-digit average rate, reflecting a more normalized growth phase post-pandemic recovery.
Profitability: IBM Demonstrates Higher Margins
Profitability is a crucial metric for investors, and in this aspect, IBM outperforms Delta Air Lines. IBM’s operating margin expanded significantly from 8.4% in 2020 to 15.2% in 2023. In contrast, while Delta Air Lines improved its operating margin from -24.9% to 9.1% over the same period, it still lags behind IBM. IBM’s focus on cost reduction, including headcount reductions and automation, is expected to further improve its margins, with projected cost savings of $3 billion in 2024, increased from an initial estimate of $2 billion. Delta, on the other hand, faces margin pressures from rising operational costs, particularly fuel costs. Jet fuel prices remain volatile and recently increased due to geopolitical tensions, impacting airline profitability. Over the last twelve months, IBM’s operating margin stood at a robust 15%, compared to Delta’s 10%.
Financial Risk: IBM Presents a Lower Risk Profile
Assessing financial risk is essential when comparing investment options. IBM exhibits a lower financial risk profile compared to Delta Air Lines. IBM’s debt-to-equity ratio is considerably lower at 28% compared to Delta’s 80%. Furthermore, IBM holds a higher percentage of cash as a percentage of assets at 10%, versus Delta’s 6%. These metrics indicate that IBM has a stronger balance sheet with less leverage and more liquidity, suggesting lower financial risk.
Investment Outlook: Delta Air Lines Potentially Offers Better Returns
In summary, while Delta Air Lines has demonstrated stronger revenue growth, IBM exhibits higher profitability and lower financial risk. However, when considering future prospects and valuation, Delta Air Lines emerges as potentially offering better returns over the next three years. Currently, IBM’s valuation appears less attractive. Our estimated valuation for IBM stock is $202 per share, approximately 12% below its current market price of $230. IBM stock is trading at a price-to-sales (P/S) ratio of 3.4x trailing revenues, significantly higher than its five-year average P/S ratio of 1.9x. In contrast, Delta Air Lines stock, trading around $50, has a P/S ratio of approximately 0.5x revenues, which is below its five-year average P/S ratio of 0.8x. This suggests that Delta Air Lines is potentially undervalued compared to IBM. Therefore, based on current valuations and growth prospects, Delta Air Lines is likely to provide more favorable returns than IBM in the next three years.
While this analysis suggests that Delta Air Lines might outperform IBM in the near term, it is beneficial to explore how IBM’s competitors are performing across key metrics. Comparative analysis with industry peers can offer a broader perspective on investment decisions. Resources for peer comparisons across various industries are readily available for further research.
