IBM (NYSE: IBM) is currently being considered a better investment option compared to Merck (NYSE: MRK) due to various factors. Both companies have a similar revenue base of around $61 billion and are part of the Dow 30 Index. While Merck has experienced better revenue growth, IBM is shown to be more profitable. In the last three years, Merck’s stock has outperformed IBM, with a 65% increase compared to IBM’s 40%. However, both stocks underperformed the S&P 500 during this period.
Merck’s revenue growth has been impressive, averaging 13.5% annually from $41.5 billion in 2020 to $60.1 billion in 2023. This growth has been driven by the success of Keytruda and the HPV vaccine Gardasil. On the other hand, IBM’s revenue growth has been slower at 3.9% annually from $55.2 billion to $61.9 billion during the same period. The company’s growth is led by its software products, including Red Hat and Data & AI solutions, with a focus on capitalizing on the increasing demand for AI.
When it comes to profitability, IBM has seen an expansion in its operating margin from 8.4% to 15.2% from 2020 to 2023, while Merck’s operating margin fell from 13.4% to 4.9% over the same period. IBM has also been focused on reducing costs and has a higher operating margin compared to Merck. Both companies have comparable financial risks, with Merck having lower debt as a percentage of equity and IBM having a higher cash cushion.
Looking at future prospects, IBM is deemed the better choice due to its focus on core areas such as cloud computing, AI, and automation after divesting its legacy business. The company’s mid-size acquisitions to strengthen its higher-margin software products also indicate potential for growth. On the other hand, Merck may continue to see revenue growth in the near term, but its stock valuation may be impacted by the loss of market exclusivity for Keytruda in 2028.
In conclusion, IBM is expected to offer better returns than Merck in the next three years, despite Merck’s better revenue growth. While Merck’s stock may see a downward adjustment in its valuation multiple, IBM’s focus on key growth areas positions it well for future success. Investors are advised to consider these factors before making an investment decision between the two companies.
