QUALCOMM Incorporated (NASDAQ:QCOM) shares are up more than 2.02% this year and recently decreased -2.72% or -$1.86 to settle at $66.52. Viavi Solutions Inc. (NASDAQ:VIAV), on the other hand, is up 13.57% year to date as of 11/28/2017. It currently trades at $9.29 and has returned 2.20% during the past week.
QUALCOMM Incorporated (NASDAQ:QCOM) and Viavi Solutions Inc. (NASDAQ:VIAV) are the two most active stocks in the Communication Equipment industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
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 QCOM to grow earnings at a 10.50% annual rate over the next 5 years. Comparatively, VIAV is expected to grow at a 10.00% annual rate. All else equal, QCOM’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 18.87% for Viavi Solutions Inc. (VIAV). QCOM’s ROI is 3.60% while VIAV has a ROI of -0.50%. The interpretation is that QCOM’s business generates a higher return on investment than VIAV’s.
The value of a stock is simply the present value of its future free cash flows. QCOM’s free cash flow (“FCF”) per share for the trailing twelve months was +0.88. Comparatively, VIAV’s free cash flow per share was +0.01. On a percent-of-sales basis, QCOM’s free cash flow was 5.82% while VIAV converted 0% of its revenues into cash flow. This means that, for a given level of sales, QCOM is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. QCOM has a current ratio of 4.00 compared to 2.20 for VIAV. This means that QCOM can more easily cover its most immediate liabilities over the next twelve months. QCOM’s debt-to-equity ratio is 0.71 versus a D/E of 1.08 for VIAV. VIAV is therefore the more solvent of the two companies, and has lower financial risk.
QCOM trades at a forward P/E of 17.57, a P/B of 3.19, and a P/S of 4.40, compared to a forward P/E of 18.88, a P/B of 2.76, and a P/S of 2.66 for VIAV. QCOM is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. 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. QCOM is currently priced at a 4.04% to its one-year price target of 63.94. Comparatively, VIAV is -22.06% relative to its price target of 11.92. This suggests that VIAV 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 2.50 for QCOM and 2.30 for VIAV, which implies that analysts are more bullish on the outlook for QCOM.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. QCOM has a beta of 1.26 and VIAV’s beta is 1.28. QCOM’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.QCOM has a short ratio of 1.82 compared to a short interest of 5.03 for VIAV. This implies that the market is currently less bearish on the outlook for QCOM.
QUALCOMM Incorporated (NASDAQ:QCOM) beats Viavi Solutions Inc. (NASDAQ:VIAV) on a total of 10 of the 14 factors compared between the two stocks. QCOM is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, QCOM has better sentiment signals based on short interest.