The past month hasn't been kind to either Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) or IBM (NYSE: IBM) following their respective earnings reports. Alphabet once again showed remarkable growth, particularly considering its size, but concerns regarding a large fine imposed by European Union regulators, related to Google's search-result ranking practices, and the possibility of continued haggling with the folks across the pond have left some investors concerned.
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Another quarter of total revenue declines and slowing growth of IBM's all-important strategic-imperatives segments has put more pressure on its stock. But at current levels Big Blue is one of the best values in its sector and pays a handsome dividend. So which is the better buy: Alphabet -- more commonly known as Google -- or IBM? Both offer compelling arguments, but one has a distinct edge.
The case for IBM
The 5% drop in total sales to $19.3 billion got most of the press, but the most concerning development was the slowing of IBM's critical strategic-imperatives units, which include the cloud, cognitive computing via its Watson supercomputer, data security, and mobile.
That said, last quarter was a success in a number of areas. At an annual run rate of $15.1 billion, IBM is one of the leading cloud providers on the planet. In a market most analysts expect to grow nearly exponentially in the coming years, IBM is already leading the charge.
Better still, on a trailing-12-month basis, software as a service (SaaS) delivered via the cloud climbed 30% year over year to $8.8 billion. Mobile revenue rose an impressive 27%, though the 4% increase in analytic sales and data security was a bit disheartening given IBM's past results.
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Last quarter IBM also took a step in the right direction in the area of improving efficiency, another on of its initiatives. Operating expenses dropped $302 million and are now down 11% year to date. Despite the negative market sentiment, or perhaps because of it, at a forward valuation of just 10 times earnings, IBM and its 4.2% dividend yield offer value investors in search of income an intriguing option.
The case for Alphabet
The downside of the EU's whopping $2.74 billion fine for the manner in which Alphabet ranks its search results caused some consternation. The result of the fine was a 40% drop in operating income excluding the EU's levy, to $4.13 billion, and an earnings-per-share (EPS) hit of 44%; EPS would have been $8.90 a share, but came in at $5.01 instead. Bad news, right?
But aside from the one-time fine, Alphabet once again absolutely crushed the second quarter. Total revenue climbed 21% to $26 billion, which is jaw-dropping considering it generated $21.5 billion in sales a year ago. In other words, Alphabet continues growing like a hyper-growth upstart though it's one of the largest companies in the world.
Operating income jumped 10% to $7.8 billion, and paid clicks climbed an astonishing 52% year over year, more than making up for the 23% drop in aggregate cost per click. As usual, Alphabet's staggering balance sheet grew again last quarter to $94.7 billion in cash and equivalents -- and those are just the ready funds here in the States.
The EU "situation" aside, Alphabet continues to essentially print money at a remarkable rate. I'd still like to see Alphabet give some of its cash hoard back to shareholders in the form of a dividend, but that's just splitting hairs.
The envelope, please
As a fan of value investing, particularly when significant income is part of equation, I think IBM is a compelling choice. However, EU fine or no EU fine, Alphabet's continued growth is mind-boggling and it appears there is no end in sight. For that reason, Alphabet -- and its seemingly unlimited upside -- is the better buy.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Tim Brugger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.