Pick Microsoft Stock Over IBM?

Why would investors pay 38x earnings for IBM stock when Microsoft stock is available at just 30x? The comparison becomes even more favorable for Microsoft when considering three key factors:

• Superior Growth Trajectory: Microsoft is demonstrating robust growth exceeding 12% on average over the last three years, significantly outpacing IBM’s modest sub-3% growth rate. This substantial growth differential suggests stronger future returns for Microsoft shareholders.
• Impressive Profit Margins: Microsoft’s operating margins exceed 45%, so more of that top line growth makes its way to shareholders. Compared to what? Compare with IBM’s 16% figure.
• Tariff Resilience: Both Microsoft and IBM face reduced vulnerability to tariff pressures compared to hardware-focused tech companies, thanks to their significant software revenue streams. This provides a degree of insulation from certain geopolitical risks affecting the sector.

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Is Microsoft A Safe Bet?

Microsoft isn’t without volatility. The stock has already experienced a correction, falling from highs of approximately $450 in January to below $360 last week, before recovering to $390 currently. It fell 36% in the 2022 inflation shock and 28% during the 2020 Covid-19 pandemic sell off. So, MSFT stock is not exactly a “safe stock.” For those seeking a balanced approach, the Trefis High Quality portfolio strategy has demonstrated impressive performance, delivering over 91% returns since inception, outperforming broader market indices.

Strategic Position In AI And Cloud

Microsoft has established itself as a crucial infrastructure provider in the AI revolution through its Azure cloud platform. Similar to how Nvidia supplies the essential GPU processing power, Microsoft Azure delivers the computing resources, data storage, and networking capabilities that support AI development across numerous companies, including key players like OpenAI.

Investing in Microsoft provides exposure to the overall AI growth story without requiring investors to predict which specific AI application will dominate. Microsoft supplies the fundamental infrastructure upon which the AI competitive landscape is developing, positioning it as a potential long-term winner.

Potential Risks

Several risks warrant consideration:

• Earnings disappointments remain possible
• Near-term growth could slow as companies prioritize cash conservation
• Unexpected market developments could impact performance

You should be prepared for the possibility of significant downside—potentially up to 30%—and avoid panic selling during market corrections. For those with a 3- to 5-year investment horizon and a tolerance for market volatility, Microsoft’s current valuation could represent a compelling entry point. The company’s strong position and continued innovation in high-growth areas like artificial intelligence and cloud computing suggest substantial growth potential in the coming years. Selling during a downturn would likely mean locking in losses and missing out on this future growth. Instead talk to an adviser who’s seen multiple bear markets in the last 30 years about Trefis HQ strategy and other clever ways you can take advantage of a market downturn. Remember, significant wealth is often created during periods of market volatility by those who remain calm and strategic.

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