Extreme Networks, Inc. (NASDAQ:EXTR) shares are down more than -6.95% this year and recently increased 4.67% or $0.52 to settle at $11.65. Zayo Group Holdings, Inc. (NYSE:ZAYO), on the other hand, is down -3.40% year to date as of 02/12/2018. It currently trades at $35.55 and has returned -1.39% during the past week.
Extreme Networks, Inc. (NASDAQ:EXTR) and Zayo Group Holdings, Inc. (NYSE:ZAYO) are the two most active stocks in the Networking & Communication Devices 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.
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 EXTR to grow earnings at a 20.00% annual rate over the next 5 years. Comparatively, ZAYO is expected to grow at a 40.80% annual rate. All else equal, ZAYO’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 42.29% for Zayo Group Holdings, Inc. (ZAYO). EXTR’s ROI is -2.30% while ZAYO has a ROI of 4.80%. The interpretation is that ZAYO’s business generates a higher return on investment than EXTR’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. EXTR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.09. Comparatively, ZAYO’s free cash flow per share was -0.02. On a percent-of-sales basis, EXTR’s free cash flow was -0% while ZAYO converted -0.23% of its revenues into cash flow. This means that, for a given level of sales, EXTR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. EXTR has a current ratio of 1.10 compared to 1.00 for ZAYO. This means that EXTR can more easily cover its most immediate liabilities over the next twelve months. EXTR’s debt-to-equity ratio is 1.64 versus a D/E of 3.74 for ZAYO. ZAYO is therefore the more solvent of the two companies, and has lower financial risk.
EXTR trades at a forward P/E of 9.93, a P/B of 11.89, and a P/S of 1.75, compared to a forward P/E of 61.61, a P/B of 5.83, and a P/S of 3.49 for ZAYO. 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. EXTR is currently priced at a -30.24% to its one-year price target of 16.70. Comparatively, ZAYO is -13% relative to its price target of 40.86. This suggests that EXTR 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 2.00 for EXTR and 2.10 for ZAYO, which implies that analysts are more bullish on the outlook for ZAYO.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. EXTR has a beta of 1.64 and ZAYO’s beta is 0.51. ZAYO’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.EXTR has a short ratio of 0.88 compared to a short interest of 5.96 for ZAYO. This implies that the market is currently less bearish on the outlook for EXTR.
Extreme Networks, Inc. (NASDAQ:EXTR) beats Zayo Group Holdings, Inc. (NYSE:ZAYO) on a total of 8 of the 14 factors compared between the two stocks. EXTR has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, EXTR is the cheaper of the two stocks on an earnings and sales basis, EXTR is more undervalued relative to its price target. Finally, EXTR has better sentiment signals based on short interest.