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Dissecting the Numbers for Seagate Technology plc (STX) and Chegg, Inc. (CHGG)

Seagate Technology plc (NASDAQ:STX) shares are up more than 41.90% this year and recently increased 2.77% or $1.6 to settle at $59.37. Chegg, Inc. (NYSE:CHGG), on the other hand, is up 54.96% year to date as of 05/16/2018. It currently trades at $25.29 and has returned 2.39% during the past week.

Seagate Technology plc (NASDAQ:STX) and Chegg, Inc. (NYSE:CHGG) are the two most active stocks in the Data Storage Devices industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect STX to grow earnings at a 10.70% annual rate over the next 5 years. Comparatively, CHGG is expected to grow at a 25.00% annual rate. All else equal, CHGG’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 1.95% for Chegg, Inc. (CHGG). STX’s ROI is 15.80% while CHGG has a ROI of -5.40%. The interpretation is that STX’s business generates a higher return on investment than CHGG’s.

Cash Flow



Cash is king when it comes to investing. STX’s free cash flow (“FCF”) per share for the trailing twelve months was +1.07. Comparatively, CHGG’s free cash flow per share was +0.02. On a percent-of-sales basis, STX’s free cash flow was 2.85% while CHGG converted 0% of its revenues into cash flow. This means that, for a given level of sales, STX is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. STX has a current ratio of 1.70 compared to 4.40 for CHGG. This means that CHGG can more easily cover its most immediate liabilities over the next twelve months. STX’s debt-to-equity ratio is 3.54 versus a D/E of 0.00 for CHGG. STX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

STX trades at a forward P/E of 10.82, a P/B of 12.45, and a P/S of 1.60, compared to a forward P/E of 47.01, a P/B of 7.57, and a P/S of 10.29 for CHGG. 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. STX is currently priced at a 4.75% to its one-year price target of 56.68. Comparatively, CHGG is 2.6% relative to its price target of 24.65. This suggests that CHGG is the better investment over the next year.

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. STX has a beta of 1.63 and CHGG’s beta is 1.43. CHGG’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. STX has a short ratio of 4.64 compared to a short interest of 13.90 for CHGG. This implies that the market is currently less bearish on the outlook for STX.

Summary

Chegg, Inc. (NYSE:CHGG) beats Seagate Technology plc (NASDAQ:STX) on a total of 7 of the 14 factors compared between the two stocks. CHGG is more profitable, higher liquidity and has lower financial risk. CHGG is more undervalued relative to its price target. Finally, LYB has better sentiment signals based on short interest.

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