Cypress Semiconductor Corporation (NASDAQ:CY) shares are up more than 5.05% this year and recently increased 2.04% or $0.32 to settle at $16.01. Amazon.com, Inc. (NASDAQ:AMZN), on the other hand, is up 24.08% year to date as of 02/14/2018. It currently trades at $1451.05 and has returned 2.42% during the past week.
Cypress Semiconductor Corporation (NASDAQ:CY) and Amazon.com, Inc. (NASDAQ:AMZN) are the two most active stocks in the market 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.
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 CY to grow earnings at a 23.80% annual rate over the next 5 years. Comparatively, AMZN is expected to grow at a 27.84% annual rate. All else equal, AMZN’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 9.17% for Amazon.com, Inc. (AMZN). CY’s ROI is -19.70% while AMZN has a ROI of 4.70%. The interpretation is that AMZN’s business generates a higher return on investment than CY’s.
Cash is king when it comes to investing. CY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.46. Comparatively, AMZN’s free cash flow per share was +14.94. On a percent-of-sales basis, CY’s free cash flow was 6.59% while AMZN converted 4.07% of its revenues into cash flow. This means that, for a given level of sales, CY 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. CY has a current ratio of 1.40 compared to 1.00 for AMZN. This means that CY can more easily cover its most immediate liabilities over the next twelve months. CY’s debt-to-equity ratio is 0.61 versus a D/E of 1.11 for AMZN. AMZN is therefore the more solvent of the two companies, and has lower financial risk.
CY trades at a forward P/E of 11.29, a P/B of 2.88, and a P/S of 2.28, compared to a forward P/E of 95.52, a P/B of 25.29, and a P/S of 3.96 for AMZN. CY 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
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. CY is currently priced at a -20.55% to its one-year price target of 20.15. Comparatively, AMZN is -11.04% relative to its price target of 1631.05. This suggests that CY 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 2.40 for CY and 1.80 for AMZN, which implies that analysts are more bullish on the outlook for CY.
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. CY has a beta of 2.04 and AMZN’s beta is 1.54. AMZN’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.CY has a short ratio of 2.86 compared to a short interest of 1.12 for AMZN. This implies that the market is currently less bearish on the outlook for AMZN.
Cypress Semiconductor Corporation (NASDAQ:CY) beats Amazon.com, Inc. (NASDAQ:AMZN) on a total of 8 of the 14 factors compared between the two stocks. CY is more profitable, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, CY is the cheaper of the two stocks on an earnings, book value and sales basis, CY is more undervalued relative to its price target. Finally, MRK has better sentiment signals based on short interest.