Applied Materials, Inc. (NASDAQ:AMAT) shares are up more than 71.46% this year and recently decreased -0.02% or -$0.01 to settle at $55.33. Ambarella, Inc. (NASDAQ:AMBA), on the other hand, is down -2.57% year to date as of 10/19/2017. It currently trades at $52.74 and has returned 2.49% during the past week.

Applied Materials, Inc. (NASDAQ:AMAT) and Ambarella, Inc. (NASDAQ:AMBA) are the two most active stocks in the Semiconductor Equipment & Materials industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

**Growth**

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect AMAT to grow earnings at a 28.63% annual rate over the next 5 years. Comparatively, AMBA is expected to grow at a 14.67% annual rate. All else equal, AMAT’s higher growth rate would imply a greater potential for capital appreciation.

**Profitability and Returns**

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 18.88% for Ambarella, Inc. (AMBA). AMAT’s ROI is 17.30% while AMBA has a ROI of 12.60%. The interpretation is that AMAT’s business generates a higher return on investment than AMBA’s.

**Cash Flow **

The value of a stock is simply the present value of its future free cash flows. AMAT’s free cash flow (“FCF”) per share for the trailing twelve months was +1.09. Comparatively, AMBA’s free cash flow per share was +0.28. On a percent-of-sales basis, AMAT’s free cash flow was 10.74% while AMBA converted 0% of its revenues into cash flow. This means that, for a given level of sales, AMAT is able to generate more free cash flow for investors.

**Liquidity and Financial Risk**

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. AMAT has a current ratio of 2.90 compared to 8.90 for AMBA. This means that AMBA can more easily cover its most immediate liabilities over the next twelve months. AMAT’s debt-to-equity ratio is 0.61 versus a D/E of 0.00 for AMBA. AMAT is therefore the more solvent of the two companies, and has lower financial risk.

**Valuation**

AMAT trades at a forward P/E of 15.13, a P/B of 6.80, and a P/S of 4.27, compared to a forward P/E of 31.37, a P/B of 3.87, and a P/S of 5.41 for AMBA. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

**Analyst Price Targets and Opinions**

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. AMAT is currently priced at a -5.29% to its one-year price target of 58.42. Comparatively, AMBA is -0.9% relative to its price target of 53.22. This suggests that AMAT is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.80 for AMAT and 2.30 for AMBA, which implies that analysts are more bullish on the outlook for AMBA.

**Risk and Volatility**

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. AMAT has a beta of 1.83 and AMBA’s beta is 1.54. AMBA’s shares are therefore the less volatile of the two stocks.

**Insider Activity and Investor Sentiment**

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. AMAT has a short ratio of 1.42 compared to a short interest of 4.47 for AMBA. This implies that the market is currently less bearish on the outlook for AMAT.

**Summary**

Applied Materials, Inc. (NASDAQ:AMAT) beats Ambarella, Inc. (NASDAQ:AMBA) on a total of 10 of the 14 factors compared between the two stocks. AMAT is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, AMAT is the cheaper of the two stocks on an earnings and sales basis, AMAT is more undervalued relative to its price target. Finally, AMAT has better sentiment signals based on short interest.