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International Business Machines Corp. (IBM), Microsoft Corporation (MSFT): Same Story, Different Decade for This Tech Giant

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Billionaire David Einhorn is apparently making an exit from Microsoft Corporation (NASDAQ:MSFT) at just the same time that Jeffrey Ubben’s ValueACT Capital is betting  big on the tech giant. At the end of 1Q, Einhorn and his billion-dollar hedge fund, Greenlight Capital, owned just over 6 million Microsoft shares.

Einhorn notes that he and Greenlight took the boost in stock price that Microsoft Corporation (NASDAQ:MSFT) got from the ValueACT news to sell its stake in the tech giant, noting in his 2Q investor letter that…

The problem with Microsoft Corporation (NASDAQ:MSFT) from an investment standpoint? Over the last 10 years, the stock has traded in a tight range between $16 and $36, climbing only 20% for the decade…

ValueACT hopes to change this. During 1Q, ValueACT bought up over 33 million Microsoft Corporation (NASDAQ:MSFT) shares. The fund is now pushing for board representation and hoping to put together a succession plan for Steve Balmer. The other thing ValueACT could be pushing for includes putting Microsoft’s $75 billion in cash to work for shareholders.

Microsoft Corporation (NASDAQ:MSFT) is at an inflection point, with the company being at a crossroads thanks to its vast exposure to the declining PC market, where about 50% of its revenue is related and where Microsoft remains the dominant player in PC operating systems.

Even still, revenue is expected to be up 5.6% in fiscal 2014 and 6.1% 2015. Microsoft also has the upcoming release of its new video-game console, Xbox One, which should give interim revenue a boost while the company figures out other areas of its business model.

For a company in transition mode, it’s still trading at all-time highs, however, the stock is trading at 1990 levels on a P/E basis…

…so by historical standards it could still be considered cheap.

The tech company is moving from computing to devices (i.e. mobile and tablets) and services. However, its foray into the table market has not proven all that successful. Last month, the tech company had to reduce prices of its Surface tablets; moving its Surface RT 32GB version to $349 from $499 and the Surface RT 64GB version to $499 from $649.

To help put in perspective just how far behind Microsoft is in the tablet market, let’s compare it to tablet-leader Apple Inc. (NASDAQ:AAPL). IDC reported that for the first quarter, Microsoft sold 900,000 tablets compared to Apple’s 19.5 million, over 20 times that of Microsoft.

Big blue better?

Could International Business Machines Corp. (NYSE:IBM), aka Big Blue, be a better bet in the tech field? The company operates in the high-margin software and services part of the tech market. The tech giant also enjoys a return on equity in excess of 80% and return on invested capital in excess of 30%, well above Microsoft or Apple Inc. (NASDAQ:AAPL).

IBM has a diverse product portfolio, having been awarded 6,478 patents in 2012, more than any other company for the 20th straight year. International Business Machines Corp. (NYSE:IBM) also has operations in over 170 countries.

Last month, the company posted solid EPS results. Second-quarter EPS came in at $3.91 compared to $3.51 for the same period last year. But the numbers get better than just growing EPS. Operating margins expanded and Big Blue revised full-year guidance upwards; both moves were attributable to its greater focus on higher growth markets. IBM also pays a near 2% dividend yield and trades just under 14 times earnings.

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