Etsy, Inc. (NASDAQ:ETSY) shares are down more than -6.11% this year and recently increased 0.31% or $0.06 to settle at $19.20. Ulta Beauty, Inc. (NASDAQ:ULTA), on the other hand, is up 1.80% year to date as of 01/26/2018. It currently trades at $227.69 and has returned -6.73% during the past week.
Etsy, Inc. (NASDAQ:ETSY) and Ulta Beauty, Inc. (NASDAQ:ULTA) are the two most active stocks in the Specialty Retail, Other 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 ETSY to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, ULTA is expected to grow at a 18.62% annual rate. All else equal, ULTA’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 18.13% for Ulta Beauty, Inc. (ULTA). ETSY’s ROI is -2.60% while ULTA has a ROI of 26.40%. The interpretation is that ULTA’s business generates a higher return on investment than ETSY’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. ETSY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.12. Comparatively, ULTA’s free cash flow per share was -0.57. On a percent-of-sales basis, ETSY’s free cash flow was 0% while ULTA converted -0.72% of its revenues into cash flow. This means that, for a given level of sales, ETSY 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. ETSY has a current ratio of 4.30 compared to 2.30 for ULTA. This means that ETSY can more easily cover its most immediate liabilities over the next twelve months. ETSY’s debt-to-equity ratio is 0.03 versus a D/E of 0.00 for ULTA. ETSY is therefore the more solvent of the two companies, and has lower financial risk.
ETSY trades at a forward P/E of 67.13, a P/B of 6.60, and a P/S of 5.61, compared to a forward P/E of 21.37, a P/B of 8.64, and a P/S of 2.51 for ULTA. ETSY is the cheaper of the two stocks on book value basis but is expensive in terms of P/E 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
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”. ETSY is currently priced at a 3.67% to its one-year price target of 18.52. Comparatively, ULTA is -16.11% relative to its price target of 271.43. This suggests that ULTA 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 2.80 for ETSY and 2.20 for ULTA, which implies that analysts are more bullish on the outlook for ETSY.
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.ETSY has a short ratio of 1.99 compared to a short interest of 2.15 for ULTA. This implies that the market is currently less bearish on the outlook for ETSY.
Ulta Beauty, Inc. (NASDAQ:ULTA) beats Etsy, Inc. (NASDAQ:ETSY) on a total of 8 of the 14 factors compared between the two stocks. ULTA has higher cash flow per share, is more profitable, generates a higher return on investment and has lower financial risk. In terms of valuation, ULTA is the cheaper of the two stocks on an earnings and sales basis, ULTA is more undervalued relative to its price target. Finally, ODP has better sentiment signals based on short interest.