Intuitive Surgical, Inc. (NASDAQ:ISRG) shares are up more than 10.16% this year and recently increased 0.88% or $3.49 to settle at $402.00. AcelRx Pharmaceuticals, Inc. (NASDAQ:ACRX), on the other hand, is down -14.81% year to date as of 02/13/2018. It currently trades at $1.73 and has returned -4.17% during the past week.
Intuitive Surgical, Inc. (NASDAQ:ISRG) and AcelRx Pharmaceuticals, Inc. (NASDAQ:ACRX) are the two most active stocks in the Medical Appliances & Equipment industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect ISRG to grow earnings at a 11.93% annual rate over the next 5 years.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Intuitive Surgical, Inc. (ISRG) has an EBITDA margin of 37.42%. This suggests that ISRG underlying business is more profitable ISRG’s ROI is 13.10% while ACRX has a ROI of -35.70%. The interpretation is that ISRG’s business generates a higher return on investment than ACRX’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. ISRG’s free cash flow (“FCF”) per share for the trailing twelve months was +2.68. Comparatively, ACRX’s free cash flow per share was -0.16. On a percent-of-sales basis, ISRG’s free cash flow was 9.62% while ACRX converted -0.05% of its revenues into cash flow. This means that, for a given level of sales, ISRG 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. ISRG has a current ratio of 4.00 compared to 4.80 for ACRX. This means that ACRX can more easily cover its most immediate liabilities over the next twelve months.
ISRG trades at a forward P/E of 36.28, a P/B of 9.53, and a P/S of 14.39, compared to a P/S of 6.89 for ACRX. ISRG 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. ISRG is currently priced at a -12.01% to its one-year price target of 456.88. Comparatively, ACRX is -56.75% relative to its price target of 4.00. This suggests that ACRX 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 2.10 for ISRG and 2.50 for ACRX, which implies that analysts are more bullish on the outlook for ACRX.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. ISRG has a beta of 0.65 and ACRX’s beta is 2.48. ISRG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. ISRG has a short ratio of 2.07 compared to a short interest of 8.97 for ACRX. This implies that the market is currently less bearish on the outlook for ISRG.
Intuitive Surgical, Inc. (NASDAQ:ISRG) beats AcelRx Pharmaceuticals, Inc. (NASDAQ:ACRX) on a total of 8 of the 14 factors compared between the two stocks. ISRG is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. Finally, ISRG has better sentiment signals based on short interest.