Oracle vs. IBM: Which Cloud Computing Stock Is the Better Buy?

It wasn't that long ago when Oracle (NYSE: ORCL) looked poised to become a $1 trillion company. However, those plans came to an abrupt halt as the stock shed 40% of its value over the past year.

Fellow cloud platform provider IBM (NYSE: IBM) hasn't fared well either, but its flat year-to-date performance looks timid in comparison. Both companies are primed to capitalize on artificial intelligence tailwinds and are already gaining market share. The dip makes Oracle look more attractive, while IBM is less risky.

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Cloud is a big part of the story

Both companies generate a large portion of their revenue from cloud computing, so it's good to start there. IBM lists hybrid cloud under its software segment. IBM's cloud revenue increased by 13% year over year in Q1, which lifted software sales up by 11% year over year. The overall revenue growth rate across the company was 9%.

Oracle gets more out of its cloud division, and it's at the centerpiece of the company's artificial intelligence plans. Oracle Cloud revenue surged by 47% year over year in its fiscal 2026 fourth quarter. The Cloud Infrastructure segment accounted for more than half of its cloud revenue and almost doubled year over year. This development suggests overall cloud revenue growth rates will continue to accelerate.

Oracle even reached $638 billion in remaining performance obligations. It offers good revenue visibility, but it depends largely on OpenAI. ChatGPT's parent company agreed to a five-year deal worth more than $300 billion, set to begin in 2027. That's almost half of Oracle's remaining performance obligations, and it comes from a company that remains unprofitable.

How OpenAI will cover a $60 billion bill each year for five years starting in 2027 remains anyone's guess, and that's far from OpenAI's only financial commitment. Remaining performance obligations only translate into revenue if the customer can actually pay, and OpenAI's large influence on Oracle's future business results is part of the reason why the stock has slumped.

IBM Z is a catalyst, but it's small for now

The IBM Z portfolio consists of the company's mainframe computers, which promise zero downtime. They are valuable resources for real-time AI inference, with a single machine having the ability to process more than one million transactions per second.

Naturally, this part of the business is important for AI infrastructure and has done extremely well. It's up 51% year over year, suggesting that IBM isn't as heavily tied to cloud computing as Oracle.

However, IBM Z is still a small part of the business. It's a small slice of Infrastructure revenue, which reached $3.3 billion. That was good for a 15% year-over-year improvement, but the entire Infrastructure segment accounted for a little more than 20% of total revenue. IBM Z's impact on the overall business is even smaller.

Oracle also has other business segments that are growing. Its revenue from hardware and services rose by 9% and 13% year over year, respectively, but those two segments make up less than 15% of Oracle's total revenue. Oracle's software sales were down 2% year over year and accounted for more than one-third of total sales.

IBM has more ways to diversify beyond cloud, but cloud computing is all Oracle has needed to deliver higher revenue and net income growth rates than IBM.

The valuations

When Oracle looked set to reach the $1 trillion milestone, it traded at a much higher valuation than IBM. However, the correction and strengthening of fundamentals now mean Oracle trades at a discount to Big Blue. Oracle only trades at a 25 P/E ratio, while IBM trades at 26 times earnings.

Although those valuations are close, Oracle is growing faster. When looking at metrics that factor in growth rates, such as the forward P/E ratio and the PEG (price-to-earnings-to-growth) ratio, Oracle's lead widens.

While any concerns with OpenAI covering its array of expenses could hurt Oracle's backlog, it's having no issue with delivering impressive growth rates right now. Oracle's full-year fiscal 2027 guidance even implied 28% year-over-year revenue growth at the midpoint, with cloud computing doing most of the work.

IBM is also a strong contender that could rebound and deliver positive returns by the end of the year, but the Oracle dip may have been a bit too harsh. Investors who can choose only one may want to prioritize Oracle.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines and Oracle. The Motley Fool has a disclosure policy.