Intel Corporation (NASDAQ:INTC) shares are up more than 27.27% this year and recently decreased -0.13% or -$0.06 to settle at $46.16. Cypress Semiconductor Corporation (NASDAQ:CY), on the other hand, is up 33.22% year to date as of 01/01/2018. It currently trades at $15.24 and has returned -0.91% during the past week.
Intel Corporation (NASDAQ:INTC) and Cypress Semiconductor Corporation (NASDAQ:CY) are the two most active stocks in the Semiconductor – Broad Line 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect INTC to grow earnings at a 8.91% annual rate over the next 5 years. Comparatively, CY is expected to grow at a 45.50% annual rate. All else equal, CY’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 11.22% for Cypress Semiconductor Corporation (CY). INTC’s ROI is 11.10% while CY has a ROI of -19.70%. The interpretation is that INTC’s business generates a higher return on investment than CY’s.
If there’s one thing investors care more about than earnings, it’s cash flow. INTC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.42. Comparatively, CY’s free cash flow per share was +0.25. On a percent-of-sales basis, INTC’s free cash flow was 3.31% while CY converted 4.34% 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 are important because they reveal the financial health of a company. INTC has a current ratio of 1.60 compared to 1.40 for CY. This means that INTC can more easily cover its most immediate liabilities over the next twelve months. INTC’s debt-to-equity ratio is 0.45 versus a D/E of 0.61 for CY. CY is therefore the more solvent of the two companies, and has lower financial risk.
INTC trades at a forward P/E of 14.11, a P/B of 3.05, and a P/S of 3.48, compared to a forward P/E of 12.87, a P/B of 2.75, and a P/S of 2.26 for CY. INTC is the expensive 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. INTC is currently priced at a -1.93% to its one-year price target of 47.07. Comparatively, CY is -17.44% relative to its price target of 18.46. 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 INTC and 2.40 for CY, which implies that analysts are equally bullish on their outlook for the two stocks.
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. INTC has a beta of 1.06 and CY’s beta is 2.02. INTC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. INTC has a short ratio of 5.40 compared to a short interest of 3.44 for CY. This implies that the market is currently less bearish on the outlook for CY.
Cypress Semiconductor Corporation (NASDAQ:CY) beats Intel Corporation (NASDAQ:INTC) on a total of 7 of the 14 factors compared between the two stocks. CY is more profitable and has a higher cash conversion rate. 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, CY has better sentiment signals based on short interest.