Alphabet Inc. (NASDAQ:GOOGL) shares are up more than 0.07% this year and recently decreased -0.04% or -$0.42 to settle at $1054.14. GrubHub Inc. (NYSE:GRUB), on the other hand, is up 22.52% year to date as of 02/13/2018. It currently trades at $87.97 and has returned 27.68% during the past week.
Alphabet Inc. (NASDAQ:GOOGL) and GrubHub Inc. (NYSE:GRUB) are the two most active stocks in the Internet Information Providers 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.
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 GOOGL to grow earnings at a 24.57% annual rate over the next 5 years. Comparatively, GRUB is expected to grow at a 23.05% annual rate. All else equal, GOOGL’s higher growth rate would imply a greater potential for capital appreciation.
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., compared to an EBITDA margin of 16.09% for GrubHub Inc. (GRUB). GOOGL’s ROI is 7.40% while GRUB has a ROI of 5.10%. The interpretation is that GOOGL’s business generates a higher return on investment than GRUB’s.
Cash is king when it comes to investing. GOOGL’s free cash flow (“FCF”) per share for the trailing twelve months was +8.58. Comparatively, GRUB’s free cash flow per share was +0.62. On a percent-of-sales basis, GOOGL’s free cash flow was 5.38% while GRUB converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, GOOGL 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. GOOGL has a current ratio of 5.10 compared to 3.10 for GRUB. This means that GOOGL can more easily cover its most immediate liabilities over the next twelve months. GOOGL’s debt-to-equity ratio is 0.03 versus a D/E of 0.00 for GRUB. GOOGL is therefore the more solvent of the two companies, and has lower financial risk.
GOOGL trades at a forward P/E of 21.70, a P/B of 4.80, and a P/S of 6.34, compared to a forward P/E of 40.48, a P/B of 7.22, and a P/S of 11.62 for GRUB. GOOGL is the cheaper 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
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”. GOOGL is currently priced at a -17.5% to its one-year price target of 1277.79. Comparatively, GRUB is 21% relative to its price target of 72.70. This suggests that GOOGL 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 1.80 for GOOGL and 2.20 for GRUB, which implies that analysts are more bullish on the outlook for GRUB.
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. GOOGL has a beta of 1.09 and GRUB’s beta is 0.77. GRUB’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. GOOGL has a short ratio of 1.75 compared to a short interest of 11.28 for GRUB. This implies that the market is currently less bearish on the outlook for GOOGL.
Alphabet Inc. (NASDAQ:GOOGL) beats GrubHub Inc. (NYSE:GRUB) on a total of 12 of the 14 factors compared between the two stocks. GOOGL is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, GOOGL is the cheaper of the two stocks on an earnings, book value and sales basis, GOOGL is more undervalued relative to its price target. Finally, GOOGL has better sentiment signals based on short interest.