If you just look at the numbers, there's little to choose between International Business Machines Corporation (NYSE:IBM) and Oracle Corporation (NASDAQ:ORCL). Oracle has a higher P/E but IBM has a higher yield. Oracle has more cash but IBM is a bigger company. Both have high walls against competition within their niches; Oracle in databases, IBM in mainframes.
Which would you rather own?
IBM, and here's why:
Oracle has the same problem as Apple (NASDAQ:AAPL), what do you do when Elvis leaves the building? Elvis in this case is founder Larry Ellison, and it has been his acquisition strategies, and his ruthlessness, that have always defined the company. If a bus ran over IBM CEO Sam Palmisano tomorrow the stock would barely budge and he would consider that a compliment.
Oracle has a serious problem at the heart of its product line. Servers. Most say Oracle bought open source when it bought Sun Microsystems, but it was really buying a server business, and that business remains troubled. IBM sold the only hardware business it had troubles in, PCs, years ago.
Oracle is threatened by the cloud, while IBM is driving it. IBM is actually selling clouds, Linux-based systems that virtualize operating systems, that can scale to the size of the job. Oracle still sells servers.
IBM is a friend of open source. When it needed help with developer tools it got help from Eclipse. It unified its product lines under Linux. Its latest contribution to open source is giving Symphony to the Apache Foundation. While Oracle sees open source as something to monetize, IBM sees it as a way to share costs. IBM's approach is the right one.
IBM announced earnings yesterday and while few expected a blow-out quarter, most investors were pretty relaxed about it.
IBM has become what it was 40 years ago, a company you can safely put into any portfolio, one that won't embarrass you. Oracle may look like a better growth story now, but despite Ellison's physical appearance he turns 67 next month.
I've had IBM in my retirement account since early in the last decade, when I decided to stop trading and just invest. While most of my portfolio remains in mutual funds, the IBM stock is going to stay there.
Oracle, like Microsoft, became a titan because IBM lost the plot in the 1980s. Everyone remembers IBM's huge mistakes in PC operating systems. In Oracle's case the company was late with a relational database for either servers or Windows.
Could such a thing happen again? Yes. But, IBM has now gone through such a near-death experience, the drift after the founding fortune's passing (Thomas Watson Sr. Jr. in its case). It has reinvented itself in a sustainable way and is now a corporate growth machine.
Oracle remains entrepreneurial. That's good for growth, but it also makes the company enemies, and leaves it vulnerable to the reality of life without its founding father.
Disclosure: I am long IBM.