Alphabet Inc. (NASDAQ:GOOG) shares are up more than 0.54% this year and recently increased 0.02% or $0.16 to settle at $1052.10. Yelp Inc. (NYSE:YELP), on the other hand, is down -7.84% year to date as of 02/13/2018. It currently trades at $38.67 and has returned -12.67% during the past week.
Alphabet Inc. (NASDAQ:GOOG) and Yelp Inc. (NYSE:YELP) are the two most active stocks in the Internet Information Providers 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.
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 GOOG to grow earnings at a 24.57% annual rate over the next 5 years. Comparatively, YELP is expected to grow at a 29.20% 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 8.13% for Yelp Inc. (YELP).
The amount of free cash flow available to investors is ultimately what determines the value of a stock. GOOG’s free cash flow (“FCF”) per share for the trailing twelve months was +8.58. Comparatively, YELP’s free cash flow per share was +0.33. On a percent-of-sales basis, GOOG’s free cash flow was 5.38% while YELP converted 0% of its revenues into cash flow. This means that, for a given level of sales, GOOG is able to generate more free cash flow for investors.
GOOG trades at a forward P/E of 21.67, a P/B of 4.79, and a P/S of 6.46, compared to a forward P/E of 71.22, a P/B of 3.45, and a P/S of 3.82 for YELP. GOOG 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. GOOG is currently priced at a -10.69% to its one-year price target of 1178.00. Comparatively, YELP is -16.46% relative to its price target of 46.29. 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 1.60 for GOOG and 2.50 for YELP, which implies that analysts are more bullish on the outlook for YELP.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. GOOG has a short ratio of 2.00 compared to a short interest of 4.37 for YELP. This implies that the market is currently less bearish on the outlook for GOOG.
Alphabet Inc. (NASDAQ:GOOG) beats Yelp Inc. (NYSE:YELP) on a total of 8 of the 14 factors compared between the two stocks. GOOG is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. Finally, GOOG has better sentiment signals based on short interest.