In this piece, I evaluated two AI-related stocks, International Business Machines Corporation (IBM) and UiPath Inc. (PATH), to determine which is better for an investor. I believe IBM is the better buy for the reasons explained throughout this article.

There is no denying that Artificial Intelligence (AI) is the latest major tech trend, which has a multitude of enterprise and consumer applications in various sectors, including healthcare, automobile, banking and finance, surveillance, entertainment, social media, and marketing. At the World Economic Forum this year, Microsoft Corp. (MSFT) CEO Satya Nadella said that AI would go “mainstream” in “months, not years.”

ChatGPT, a chatbot developed by AI startup OpenAI, took the internet by storm and brought AI technology into the spotlight. The chatbot is based on the GPT (Generative Pretrained Transformer) language model and uses deep learning techniques to generate human-like responses to text inputs in a conversational way. Within five days of its launch in November 2022, the chatbot amassed 1 million active users, and in just two months, it topped 100 million users.

Given AI’s promising growth prospects, tech giants are looking to invest heavily in this technology to remain competitive. On January 23, MSFT announced an investment of $10 billion in OpenAI to advance cutting-edge AI research and democratize AI as a new technology platform. Growing research and innovation by tech companies should drive the adoption of AI across industry verticals.

According to a report by Grand View Research, the global artificial intelligence market is expected to expand at a 37.3% CAGR from 2023 to 2030. Tech companies IBM and PATH will likely benefit from the hype surrounding AI.

IBM is a clear winner in one-year price performance, with 4.1% returns compared to PATH’s 55.4% decline. Also, IBM’s marginal gains over the past six months compare to IBM’s 6% decline.

Here are the reasons why we think IBM could perform better in the near term:

Latest Developments

Yesterday, IBM and Cohesity announced a new data security and resiliency collaboration advancing organizations’ ability to fight the impacts of breaches and cyberattacks. The company will launch its new IBM Storage Defender solution with Cohesity’s data protection as an integral part of the offering.

IBM Storage Defender is being designed to leverage AI and event monitoring across multiple storage platforms through a single pane of glass to help enterprises’ data layer from cyber risks.

Also, On February 1, 2023, IBM and NASA’s Marshall Space Flight Center collaborated to research the impact of climate change. The collaboration will use IBM’s AI technology to discover new insights in NASA’s massive trove of Earth and geospatial science data. The joint work is expected to boost the companies’ growth and drive sustainability.

On January 17, PATH unveiled new significant upgrades within UiPath Test Suite, including migration accelerator service and test manager hub. UiPath Test Suite combines the robotic process automation (RPA) technology with omnichannel testing capabilities and connectors to create and deploy automation. The latest innovations in automated testing should bode well for the company.

Recent Financial Results

IBM’s Software revenue increased 2.8% year-over-year to $7.29 billion in the fourth quarter that ended December 31, 2022. Its gross profit was $9.63 billion, up 1.4% from the same period in 2021. Income from continuing operations grew 16.5% year-over-year to $2.87 billion. The company’s net income and EPS of common stock were $2.71 billion and $2.96 billion, up 16.3% and 15.2% year-over-year, respectively.

Furthermore, IBM’s cash inflows from operating activities were $3.97 billion, an increase of 55.9% year-over-year. The company’s solid top-and-bottom line growth demonstrates the strength of its platform-centric approach to hybrid cloud and AI.

PATH’s revenue for the third quarter that ended October 31, 2022, increased 19% year-over-year to $262.74 million, while its gross profit rose 23.8% from the year-ago value to $219.98 million. However, the company reported an operating loss of $66.99 million. In addition, its net loss and net loss per share attributable to common stockholders came in at $57.72 million and $0.10, respectively.

Expected Financial Performance

Analysts expect IBM’s revenue to increase by 3.7% in fiscal 2023 (ending December 2023) and 3.7% in fiscal 2024. The company’s EPS is expected to increase 3.9% in the current year and 6.5% during the following year. Moreover, IBM’s EPS is expected to grow at a rate of 6.7% per annum over the next five years.

Analysts expect the PATH’s revenue to increase by 15.3% for the fiscal year 2023 (ending January 2023) and 17.9% in the fiscal 2024. The company’s EPS is expected to decline by 25% in fiscal 2023 and increase by 133.3% in fiscal 2024. In addition, PATH’s EPS is expected to grow at a rate of 31.7% per annum over the next five years.

Profitability

IBM’s trailing-12-month revenue is 58.2 times what PATH generates. Moreover, IBM is more profitable, with an EBITDA margin and net income margin of 20.43% and 2.71% compared to PATH’s negative 31.26% and 34.99%, respectively. Also, IBM’s levered FCF margin of 16.04% is relatively higher than PATH’s 4.63%.

In addition, IBM’s ROE, ROA, and ROTC of 8.69%, 5.10%, and 6.30% compared with PATH’s negative 19.44%, 13.63%, and 10.98%, respectively.

Valuation

In terms of forward non-GAAP P/E, IBM is currently trading at 13.59x, 94.4% lower than PATH, which is trading at 241.62x. IBM’s forward EV/EBITDA ratio of 10.12 is significantly lower than PATH’s 164.66. Likewise, IBM’s forward EV/Sales of 2.59x compared to P’TH’s 6.57x.

POWR Ratings

IBM has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, PATH has an overall rating of D, translating to a Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. IBM has a grade of B for Quality, in sync with its higher-than-industry profitability. IBM’s trailing-12-month gross profit and EBITDA margin of 54% and 20.43% are 9.8% and 82.2% higher than the industry averages of 49.18% and 11.22%, respectively.

PATH, on the other hand, has a grade of C for Quality, consistent with its mixed profitability. PATH’s trailing-12-month gross profit margin of 83.50% is 69.78% higher than the 49.18% industry average; however, its trailing-12-month EBITDA of negative 31.26% compares to the industry average of 11.22%.

Of the 80 stocks in the Technology-Services industry, IBM is ranked #18, while PATH is ranked #23 of 25 stocks in the Software-SAAS industry.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Stability, Momentum, Value, and Sentiment. Click here to view IBM ratings.  Get all PATH ratings here.

The Winner

Artificial intelligence (AI) has become a new buzzword on the internet lately with the massive success of ChatGPT. Given AI’s widespread incorporation across various applications and industry verticals, tech giants are considering investing heavily in this space. Therefore, leading tech companies IBM and PATH are expected to benefit significantly from this backdrop.

However, PATH’s relatively weak financials, low profitability, stretched valuation, and bleak growth prospects make its competitor IBM the better buy now.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Technology-Services industry here. Also, click here to check out the top-rated stocks in the Software-SAAS industry.

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IBM shares were trading at $129.29 per share on Friday morning, up $0.36 (+0.28%). Year-to-date, IBM has declined -7.11%, versus a 4.90% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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