It might be hard to believe now, but IBM (IBM +0.39%) was once worth more than Microsoft (MSFT +0.63%). That last time that happened was on Dec. 12, 2011 when IBM was worth $216 billion and Microsoft had a market cap of $215 billion.
But today, IBM is only worth $214 billion, while Microsoft has grown into the world's third-most valuable company with a market cap of $3.18 trillion. Let's see why these two tech giants went on such different trajectories over the past 13 years and if IBM can fire up its growth engines again to match Microsoft's market cap by 2035.
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Why IBM slumped as Microsoft soared
In 2011, IBM and Microsoft were both considered mature tech companies. But over the following decade, they adopted radically different strategies.
IBM divested its lower-margin businesses, cut costs, and plowed its cash into big buybacks to grow its earnings per share (EPS) as its revenue growth stalled out. But by doing so, it neglected the rapidly growing cloud-infrastructure and services market which would eventually disrupt its aging enterprise software and hardware businesses.
Microsoft was on a similar path until its cloud chief Satya Nadella became its CEO in 2014. Under Nadella, Microsoft adopted a "mobile first, cloud first" mantra to expand its cloud services and launch more mobile versions of its desktop apps. It transformed Windows into a hub for those services, launched new hardware devices, and expanded its Xbox gaming business with big acquisitions. It also invested in OpenAI and integrated the start-up's AI tools into its own cloud-based services.
How fast did these two tech giants grow?
Microsoft's strategy initially squeezed its operating margins, but it paid off as it expanded Azure into the world's second-largest cloud-infrastructure platform, locked more users into its cloud-based productivity services, and gained an early-mover's edge in the booming AI market.
From fiscal 2014 to fiscal 2024 (which ended this June), Microsoft's annual revenue rose at a compound annual growth rate (CAGR) of 11% as its EPS grew at a CAGR of 16%. That's why its stock soared more than 820% over the past 10 years.
NASDAQ: MSFT
Key Data Points
IBM's struggled as it ran out of ways to squeeze more EPS growth from its falling revenues. Ginni Rometty, who led IBM as its CEO from 2012 to 2020, tried to balance its cost-cutting measures with gradual investments in the cloud market, but that progress was offset by the declines of its legacy-business hardware, software, and managed IT services divisions. From 2021 to 2021, IBM's annual revenue declined at a negative CAGR of 6%. Its EPS shrank at a negative CAGR of 9%.
But in 2021, IBM's cloud chief Arvind Krishna took the helm as its new CEO. Krishna immediately had IBM spin off its slower-growth managed IT infrastructure-services business as Kyndryl and focused on aggressively expanding its open source software-subsidiary Red Hat's presence in the hybrid-cloud and AI markets.
As a result, IBM's revenue grew at a CAGR of 4% from 2021 to 2023. Its EPS increased at a CAGR of 13%. That surprising stabilization caused IBM's stock to nearly double over the past four years and roughly match Microsoft's gains.
NYSE: IBM
Key Data Points
But could IBM catch up to Microsoft by 2035?
IBM mounted an impressive comeback under Krishna, but it's still growing at a much slower clip than Microsoft. From 2023 to 2026, analysts expect Big Blue's revenue and EPS to grow at a CAGR of 4% and 7%, respectively. But from fiscal 2024 to fiscal 2027, they expect Microsoft's revenue and EPS to rise at a CAGR of 14% and 15%, respectively.
IBM still doesn't have much direct exposure to the higher-growth cloud-infrastructure market, which is dominated by Amazon Web Services (AWS), Microsoft Azure, and Alphabet's Google Cloud. Instead, it's carving out a niche by squeezing its hybrid-cloud and AI solutions between those public cloud platforms and private on-site clouds. Microsoft has a lot more room to grow as it expands its cloud infrastructure, cloud services, AI, and Xbox gaming businesses.
Assuming IBM matches Wall Street's expectations, grows its EPS at a CAGR of 7% from 2026 to 2036, and still trades at 20 times forward earnings, its stock might rise about 80% and boost its market cap to $370 billion by 2035. But if Microsoft also matches analysts' estimates, grows its EPS at a slower CAGR of 10% from fiscal 2027 to fiscal 2036, and trades at a more modest 20 times forward earnings, its stock price could double and drive its market cap to nearly $6.4 trillion by 2035.
Therefore, IBM will still be a lot less valuable than Microsoft in 2035. However, IBM could be a much-better investment than it was over the past decade, and it could even come close to matching Microsoft's robust gains if it plays its cards right.
