Earnings

Choosing Between ServiceNow, Inc. (NOW) and Switch, Inc. (SWCH)

ServiceNow, Inc. (NYSE:NOW) shares are up more than 74.82% this year and recently decreased -0.56% or -$0.73 to settle at $129.96. Switch, Inc. (NYSE:SWCH), on the other hand, is down -18.38% year to date as of 12/18/2017. It currently trades at $17.01 and has returned -0.35% during the past week.

ServiceNow, Inc. (NYSE:NOW) and Switch, Inc. (NYSE:SWCH) are the two most active stocks in the Information Technology Services industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect NOW to grow earnings at a 52.47% annual rate over the next 5 years. Comparatively, SWCH is expected to grow at a 18.60% annual rate. All else equal, NOW’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 Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. NOW’s ROI is -47.40% while SWCH has a ROI of 6.30%. The interpretation is that SWCH’s business generates a higher return on investment than NOW’s.

Cash Flow 




Cash is king when it comes to investing. NOW’s free cash flow (“FCF”) per share for the trailing twelve months was +0.55. Comparatively, SWCH’s free cash flow per share was -0.78. On a percent-of-sales basis, NOW’s free cash flow was 6.83% while SWCH converted -0.06% of its revenues into cash flow. This means that, for a given level of sales, NOW is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. NOW has a current ratio of 1.70 compared to 0.30 for SWCH. This means that NOW can more easily cover its most immediate liabilities over the next twelve months. NOW’s debt-to-equity ratio is 2.10 versus a D/E of 5.24 for SWCH. SWCH is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NOW trades at a forward P/E of 72.12, a P/B of 40.49, and a P/S of 12.20, compared to a forward P/E of 70.58, a P/B of 21.10, and a P/S of 11.63 for SWCH. NOW is the expensive 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. NOW is currently priced at a -6.68% to its one-year price target of 139.26. Comparatively, SWCH is -18.02% relative to its price target of 20.75. This suggests that SWCH 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 NOW and 2.30 for SWCH, which implies that analysts are more bullish on the outlook for SWCH.

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.NOW has a short ratio of 7.09 compared to a short interest of 1.85 for SWCH. This implies that the market is currently less bearish on the outlook for SWCH.

Summary

Switch, Inc. (NYSE:SWCH) beats ServiceNow, Inc. (NYSE:NOW) on a total of 7 of the 14 factors compared between the two stocks. SWCH is growing fastly. In terms of valuation, SWCH is the cheaper of the two stocks on an earnings, book value and sales basis, SWCH is more undervalued relative to its price target. Finally, SWCH has better sentiment signals based on short interest.

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