Earnings

Choosing Between Hot Stocks: Microsoft Corporation (MSFT), Square, Inc. (SQ)

The shares of Microsoft Corporation have increased by more than 8.81% this year alone. The shares recently went down by -0.53% or -$0.5 and now trades at $93.08. The shares of Square, Inc. (NYSE:SQ), has jumped by 37.01% year to date as of 04/13/2018. The shares currently trade at $47.50 and have been able to report a change of 3.55% over the past one week.

The stock of Microsoft Corporation and Square, Inc. were two of the most active stocks on Friday. Investors seem to be very interested in what happens to the stocks of these two companies but do investors favor one over the other? We will analyze the growth, profitability, risk, valuation, and insider trends of both companies and see which one investors prefer.

Next 5Y EPS Growth: 11.07% versus 59.22%

When a company is able to grow consistently in terms of earnings at a high compound rate have the highest likelihood of creating value for its shareholders over time. Analysts have predicted that MSFT will grow it’s earning at a 11.07% annual rate in the next 5 years. This is in contrast to SQ which will have a positive growth at a 59.22% annual rate. This means that the higher growth rate of SQ implies a greater potential for capital appreciation over the years.

Profitability and Returns

Growth alone cannot be used to see if the company will be valuable. Shareholders will be the losers if a company invest in ventures that aren’t profitable enough to support upbeat growth. In order for us to accurately measure profitability and return, we will be using the EBITDA margin and Return on Investment (ROI), which balances the difference in capital structure. MSFT has an EBITDA margin of 27.9%, this implies that the underlying business of MSFT is more profitable. The ROI of MSFT is 11.70% while that of SQ is -4.80%. These figures suggest that MSFT ventures generate a higher ROI than that of SQ.

Cash Flow



The value of a stock is ultimately determined by the amount of cash flow that the investors have available. Over the last 12 months, MSFT’s free cash flow per share is a positive 2.31, while that of SQ is negative -0.36.

Liquidity and Financial Risk

The ability of a company to meet up with its short-term obligations and be able to clear its longer-term debts is measured using Liquidity and leverage ratios. The current ratio for MSFT is 2.90 and that of SQ is 1.80. This implies that it is easier for MSFT to cover its immediate obligations over the next 12 months than SQ. The debt ratio of MSFT is 1.14 compared to 0.46 for SQ. MSFT can be able to settle its long-term debts and thus is a lower financial risk than SQ.

Valuation

MSFT currently trades at a forward P/E of 23.76, a P/B of 9.16, and a P/S of 7.29 while SQ trades at a forward P/E of 62.17, a P/B of 23.51, and a P/S of 8.89. This means that looking at the earnings, book values and sales basis, MSFT is the cheaper one. It is very obvious that earnings are the most important factors to investors, thus analysts are most likely to place their bet on the P/E.

Analyst Price Targets and Opinions




The mistake some people make is that they think a cheap stock has more value to it. In order to know the value of a stock, there is need to compare its current price to its likely trading price in the future. The price of MSFT is currently at a -11.53% to its one-year price target of 105.21. Looking at its rival pricing, SQ is at a -3% relative to its price target of 48.97.

When looking at the investment recommendation on say a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell), MSFT is given a 1.80 while 2.40 placed for SQ. This means that analysts are more bullish on the outlook for SQ stocks.

Insider Activity and Investor Sentiment

Short interest or otherwise called the percentage of a stock’s tradable shares currently being shorted is another data that investors use to get a handle on sentiment. The short ratio for MSFT is 1.47 while that of SQ is just 2.38. This means that analysts are more bullish on the forecast for MSFT stock.

Conclusion

The stock of Square, Inc. defeats that of Microsoft Corporation when the two are compared, with SQ taking 3 out of the total factors that were been considered. SQ happens to be more profitable, generates a higher ROI, has higher cash flow per share, higher liquidity and has a lower financial risk. When looking at the stock valuation, SQ is the cheaper one on an earnings, book value and sales basis. Finally, the sentiment signal for SQ is better on when it is viewed on short interest.

Previous ArticleNext Article

Related Post

Baker Hughes, a GE company (BHGE) vs. ProPetro Hol... Baker Hughes, a GE company (NYSE:BHGE) shares are down more than -29.16% this year and recently decreased -0.53% or -$0.17 to settle at $32.06. ProPet...
Comparing Amgen Inc. (AMGN) and AstraZeneca PLC (A... Amgen Inc. (NASDAQ:AMGN) shares are up more than 7.34% this year and recently increased 2.31% or $4.22 to settle at $186.67. AstraZeneca PLC (NYSE:AZN...
Critical Comparison: Alaska Air Group, Inc. (ALK) ... Alaska Air Group, Inc. (NYSE:ALK) shares are down more than -10.92% this year and recently increased 1.46% or $0.94 to settle at $65.48. Hawaiian Hold...
A Side-by-side Analysis of Honeywell International... Honeywell International Inc. (NYSE:HON) shares are down more than -4.01% this year and recently decreased -2.58% or -$3.9 to settle at $147.21. Nation...
Phoenix New Media Limited (FENG) Technical Analysi... Phoenix New Media Limited (NYSE:FENG) fell by -6.56% in Friday’s trading session from $4.88 to $4.56 and has now fallen 3 consecutive sessions. The st...