Finance

VIVUS, Inc. (VVUS) vs. 21Vianet Group, Inc. (VNET): Which is the Better Investment?

VIVUS, Inc. (NASDAQ:VVUS) shares are up more than 31.32% this year and recently increased 26.68% or $0.14 to settle at $0.66. 21Vianet Group, Inc. (NASDAQ:VNET), on the other hand, is down -14.54% year to date as of 05/16/2018. It currently trades at $6.82 and has returned 31.91% during the past week.

VIVUS, Inc. (NASDAQ:VVUS) and 21Vianet Group, Inc. (NASDAQ:VNET) are the two most active stocks in the Biotechnology 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

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 VVUS to grow earnings at a 0.80% annual rate over the next 5 years. Comparatively, VNET is expected to grow at a 20.00% annual rate. All else equal, VNET’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use Return on Investment (ROI) as measures of profitability and return. VVUS’s ROI is 1.20% while VNET has a ROI of -9.90%. The interpretation is that VVUS’s business generates a higher return on investment than VNET’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. VVUS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.11. Comparatively, VNET’s free cash flow per share was +0.14. On a percent-of-sales basis, VVUS’s free cash flow was -0.02% while VNET converted 0% of its revenues into cash flow. This means that, for a given level of sales, VNET 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. VVUS has a current ratio of 8.70 compared to 2.40 for VNET. This means that VVUS can more easily cover its most immediate liabilities over the next twelve months.

Valuation

VVUS trades at a P/S of 1.39, compared to a P/B of 0.96, and a P/S of 1.47 for VNET. 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. VVUS is currently priced at a -56% to its one-year price target of 1.50. Comparatively, VNET is -44.87% relative to its price target of 12.37. This suggests that VVUS is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. VVUS has a beta of 0.59 and VNET’s beta is 1.74. VVUS’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. VVUS has a short ratio of 5.53 compared to a short interest of 2.26 for VNET. This implies that the market is currently less bearish on the outlook for VNET.

Summary

VIVUS, Inc. (NASDAQ:VVUS) beats 21Vianet Group, Inc. (NASDAQ:VNET) on a total of 7 of the 14 factors compared between the two stocks. VVUS generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, VVUS is the cheaper of the two stocks on book value and sales basis, VVUS is more undervalued relative to its price target.

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