1.2
Data sources: Apple investor relations, IBM investor relations, Yahoo! Finance.
Apple generates the bulk of its sales overseas, and its practice of keeping its cash offshore has triggered several not-so-small controversies in recent years. Apple held $216 billion of its cash overseas as of its most recent earnings report. That means Apple can't directly tap into the majority of its cash holdings without paying steep repatriation taxes. Rather, Apple borrows against its overseas cash to fund its capital return program.
Turning to IBM, Big Blue similarly has its financial house in order. Though it has leveraged its balance sheet to a certain extent, IBM generates plenty of cash flow to both service its debts and reinvest in its business. However, Apple's overall profitability simply can't be beat, making it the easy winner in this portion of our analysis.
Winner: Apple.
2. Durable competitive advantages
Turning to their competitive moats, Apple and IBM each enjoy some type of competitive advantage over their rivals. However, for both companies, their competitive advantages might not be as pronounced as they might initially seem.
Apple's platinum-grade brand, closed-loop operating system, consistent device leadership, and immense financial resources certainly all contribute to its ability to consistently generate above-average returns on capital. Some of these items should prove fairly straightforward. Apple's Fort Knox-esque cash reserves allow it to buy its way into virtually any industry that interests it. However, Apple's closed-loop software architecture receives far less attention but is arguably more important in terms of supporting Apple's competitive position.
In contrast to Alphabet's Android or Microsoft's Windows operating systems, Apple makes its software and app ecosystem available on its devices. That means users who migrate away from Apple's computers or mobile devices might not be able to bring their content with them, although third-party services such as Spotify have helped erode this situation in recent years. It also bears noting that Apple's product-driven sales model also presents something of a dormant risk. Should Apple somehow badly misstep with one of its annual device designs, its sales could suffer dramatically. Thanks to Apple's consistent device leadership, though, this situation has never come to fruition.
At IBM, the company's longtime relationships with customers and the large percentage of its sales that come from its legacy three-pronged business model provide it with something of a competitive moat as well. However, with the rise of the cloud-computing era and IBM's evolving place in that space, the company's competitive stance has perhaps weakened slightly. To cite one popular -- and important -- metric, IBM's sales have now declined for 18 consecutive quarters. IBM's backlog of prearranged service bookings also fell 0.7% in constant currency terms in its most recent quarter, although IBM still carries roughly 1.5 years' worth of revenue as bookings.
Winner: tie.
3. Valuation
On the surface, Apple and IBM appear to be comparably valued. In terms of their current P/E, forward P/E, and EV/EBITDA ratios, there appears to be little difference between the two at first glance.
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