Roku, Inc. (NASDAQ:ROKU) shares are down more than -26.86% this year and recently decreased -1.64% or -$0.63 to settle at $37.87. Valero Energy Corporation (NYSE:VLO), on the other hand, is up 0.85% year to date as of 03/12/2018. It currently trades at $92.69 and has returned 1.23% during the past week.
Roku, Inc. (NASDAQ:ROKU) and Valero Energy Corporation (NYSE:VLO) are the two most active stocks in the market 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. Comparatively, VLO is expected to grow at a 30.04% annual rate. All else equal, VLO’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 6.02% for Valero Energy Corporation (VLO). ROKU’s ROI is -14.60% while VLO has a ROI of 8.70%. The interpretation is that VLO’s business generates a higher return on investment than ROKU’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. ROKU’s free cash flow (“FCF”) per share for the trailing twelve months was -0.01. Comparatively, VLO’s free cash flow per share was -0.04. On a percent-of-sales basis, ROKU’s free cash flow was -0% while VLO converted -0.02% of its revenues into cash flow. This means that, for a given level of sales, ROKU 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. ROKU has a current ratio of 2.10 compared to 1.70 for VLO. This means that ROKU can more easily cover its most immediate liabilities over the next twelve months. ROKU’s debt-to-equity ratio is 0.00 versus a D/E of 0.40 for VLO. VLO is therefore the more solvent of the two companies, and has lower financial risk.
ROKU trades at a P/B of 27.85, and a P/S of 7.26, compared to a forward P/E of 11.45, a P/B of 1.84, and a P/S of 0.43 for VLO. ROKU 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
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”. ROKU is currently priced at a -1.89% to its one-year price target of 38.60. Comparatively, VLO is -9.13% relative to its price target of 102.00. This suggests that VLO 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 3.30 for ROKU and 2.40 for VLO, which implies that analysts are more bullish on the outlook for ROKU.
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.ROKU has a short ratio of 1.74 compared to a short interest of 3.83 for VLO. This implies that the market is currently less bearish on the outlook for ROKU.
Valero Energy Corporation (NYSE:VLO) beats Roku, Inc. (NASDAQ:ROKU) on a total of 7 of the 14 factors compared between the two stocks. VLO has higher cash flow per share, is more profitable and generates a higher return on investment. In terms of valuation, VLO is the cheaper of the two stocks on book value and sales basis, VLO is more undervalued relative to its price target. Finally, AGI has better sentiment signals based on short interest.