Yelp Inc. (NYSE:YELP) shares are up more than 3.84% this year and recently increased 0.39% or $0.17 to settle at $43.57. VeriSign, Inc. (NASDAQ:VRSN), on the other hand, is up 1.16% year to date as of 01/23/2018. It currently trades at $115.77 and has returned 2.77% during the past week.
Yelp Inc. (NYSE:YELP) and VeriSign, Inc. (NASDAQ:VRSN) are the two most active stocks in the Internet Information Providers 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect YELP to grow earnings at a 29.20% annual rate over the next 5 years. Comparatively, VRSN is expected to grow at a 8.00% annual rate. All else equal, YELP’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 68.32% for VeriSign, Inc. (VRSN). YELP’s ROI is -0.80% while VRSN has a ROI of 81.90%. The interpretation is that VRSN’s business generates a higher return on investment than YELP’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. YELP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.50. Comparatively, VRSN’s free cash flow per share was +1.23. On a percent-of-sales basis, YELP’s free cash flow was 0.01% while VRSN converted 10.61% of its revenues into cash flow. This means that, for a given level of sales, VRSN 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. YELP has a current ratio of 9.80 compared to 1.60 for VRSN. This means that YELP can more easily cover its most immediate liabilities over the next twelve months.
YELP trades at a forward P/E of 116.19, a P/B of 3.87, and a P/S of 4.40, compared to a forward P/E of 26.94, and a P/S of 9.88 for VRSN. YELP is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. YELP is currently priced at a -6.54% to its one-year price target of 46.62. Comparatively, VRSN is 4.3% relative to its price target of 111.00. This suggests that YELP 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 YELP and 3.30 for VRSN, which implies that analysts are more bullish on the outlook for VRSN.
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. YELP has a beta of 1.10 and VRSN’s beta is 0.94. VRSN’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.YELP has a short ratio of 4.86 compared to a short interest of 16.50 for VRSN. This implies that the market is currently less bearish on the outlook for YELP.
VeriSign, Inc. (NASDAQ:VRSN) beats Yelp Inc. (NYSE:YELP) on a total of 8 of the 14 factors compared between the two stocks. VRSN is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, VRSN is the cheaper of the two stocks on an earnings and book value, Finally, IAC has better sentiment signals based on short interest.