Vonage Holdings Corp. (NYSE:VG) shares are up more than 4.33% this year and recently increased 3.41% or $0.35 to settle at $10.61. 8×8, Inc. (NYSE:EGHT), on the other hand, is up 6.03% year to date as of 01/11/2018. It currently trades at $14.95 and has returned 1.36% during the past week.
Vonage Holdings Corp. (NYSE:VG) and 8×8, Inc. (NYSE:EGHT) are the two most active stocks in the Diversified Communication Services industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider 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. Analysts expect VG to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, EGHT is expected to grow at a -5.20% annual rate. All else equal, VG’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 EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 0.31% for 8×8, Inc. (EGHT). VG’s ROI is 4.10% while EGHT has a ROI of -2.30%. The interpretation is that VG’s business generates a higher return on investment than EGHT’s.
Cash is king when it comes to investing. VG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.17. Comparatively, EGHT’s free cash flow per share was +0.04. On a percent-of-sales basis, VG’s free cash flow was 0% while EGHT converted 0% of its revenues into cash flow. This means that, for a given level of sales, VG 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. VG has a current ratio of 0.60 compared to 3.90 for EGHT. This means that EGHT can more easily cover its most immediate liabilities over the next twelve months. VG’s debt-to-equity ratio is 0.55 versus a D/E of 0.00 for EGHT. VG is therefore the more solvent of the two companies, and has lower financial risk.
VG trades at a forward P/E of 31.77, a P/B of 4.74, and a P/S of 2.46, compared to a forward P/E of 171.84, a P/B of 4.46, and a P/S of 5.16 for EGHT. 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. VG is currently priced at a -7.26% to its one-year price target of 11.44. Comparatively, EGHT is -15.06% relative to its price target of 17.60. This suggests that EGHT 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 1.50 for VG and 2.20 for EGHT, which implies that analysts are more bullish on the outlook for EGHT.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. VG has a beta of -0.11 and EGHT’s beta is 0.52. VG’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. VG has a short ratio of 3.41 compared to a short interest of 3.45 for EGHT. This implies that the market is currently less bearish on the outlook for VG.
Vonage Holdings Corp. (NYSE:VG) beats 8×8, Inc. (NYSE:EGHT) on a total of 9 of the 14 factors compared between the two stocks. VG is growing fastly, is more profitable, generates a higher return on investment and has higher cash flow per share. In terms of valuation, VG is the cheaper of the two stocks on an earnings and sales basis, Finally, VG has better sentiment signals based on short interest.