Finisar Corporation (NASDAQ:FNSR) shares are down more than -41.10% this year and recently decreased -1.55% or -$0.28 to settle at $17.83. Palo Alto Networks, Inc. (NYSE:PANW), on the other hand, is up 14.21% year to date as of 12/04/2017. It currently trades at $142.82 and has returned -4.21% during the past week.
Finisar Corporation (NASDAQ:FNSR) and Palo Alto Networks, Inc. (NYSE:PANW) are the two most active stocks in the Networking & Communication Devices 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect FNSR to grow earnings at a 13.50% annual rate over the next 5 years. Comparatively, PANW is expected to grow at a 22.34% annual rate. All else equal, PANW’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Finisar Corporation (FNSR) has an EBITDA margin of 19.47%. This suggests that FNSR underlying business is more profitable FNSR’s ROI is 11.60% while PANW has a ROI of -15.80%. The interpretation is that FNSR’s business generates a higher return on investment than PANW’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. FNSR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.05. Comparatively, PANW’s free cash flow per share was +2.66. On a percent-of-sales basis, FNSR’s free cash flow was -0.39% while PANW converted 13.87% of its revenues into cash flow. This means that, for a given level of sales, PANW is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. FNSR has a current ratio of 7.70 compared to 1.20 for PANW. This means that FNSR can more easily cover its most immediate liabilities over the next twelve months. FNSR’s debt-to-equity ratio is 0.44 versus a D/E of 0.80 for PANW. PANW is therefore the more solvent of the two companies, and has lower financial risk.
FNSR trades at a forward P/E of 9.59, a P/B of 1.25, and a P/S of 1.37, compared to a forward P/E of 34.41, a P/B of 19.51, and a P/S of 6.98 for PANW. FNSR is the cheaper of the two stocks on an earnings, book value and sales basis. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. FNSR is currently priced at a -37.17% to its one-year price target of 28.38. Comparatively, PANW is -14.74% relative to its price target of 167.51. This suggests that FNSR 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 1.90 for FNSR and 2.00 for PANW, which implies that analysts are more bullish on the outlook for PANW.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. FNSR has a beta of 1.16 and PANW’s beta is 1.00. PANW’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. FNSR has a short ratio of 2.66 compared to a short interest of 3.12 for PANW. This implies that the market is currently less bearish on the outlook for FNSR.
Finisar Corporation (NASDAQ:FNSR) beats Palo Alto Networks, Inc. (NYSE:PANW) on a total of 10 of the 14 factors compared between the two stocks. FNSR is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, FNSR is the cheaper of the two stocks on an earnings, book value and sales basis, FNSR is more undervalued relative to its price target. Finally, FNSR has better sentiment signals based on short interest.