Western Digital Corporation (NASDAQ:WDC) shares are up more than 3.42% this year and recently increased 1.66% or $1.34 to settle at $82.25. Pure Storage, Inc. (NYSE:PSTG), on the other hand, is up 7.50% year to date as of 01/11/2018. It currently trades at $17.05 and has returned 1.25% during the past week.
Western Digital Corporation (NASDAQ:WDC) and Pure Storage, Inc. (NYSE:PSTG) 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect WDC to grow earnings at a 24.00% annual rate over the next 5 years. Comparatively, PSTG is expected to grow at a 40.00% annual rate. All else equal, PSTG’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. Western Digital Corporation (WDC) has an EBITDA margin of 24.37%. This suggests that WDC underlying business is more profitable WDC’s ROI is 6.40% while PSTG has a ROI of -51.60%. The interpretation is that WDC’s business generates a higher return on investment than PSTG’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. WDC’s free cash flow (“FCF”) per share for the trailing twelve months was +2.70. Comparatively, PSTG’s free cash flow per share was +0.07. On a percent-of-sales basis, WDC’s free cash flow was 4.18% while PSTG converted 0% of its revenues into cash flow. This means that, for a given level of sales, WDC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. WDC has a current ratio of 2.60 compared to 2.60 for PSTG. This means that WDC can more easily cover its most immediate liabilities over the next twelve months. WDC’s debt-to-equity ratio is 1.09 versus a D/E of 0.00 for PSTG. WDC is therefore the more solvent of the two companies, and has lower financial risk.
WDC trades at a forward P/E of 6.87, a P/B of 2.01, and a P/S of 1.24, compared to a forward P/E of 243.57, a P/B of 7.93, and a P/S of 4.03 for PSTG. WDC is the cheaper 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. WDC is currently priced at a -28.12% to its one-year price target of 114.43. Comparatively, PSTG is -17.51% relative to its price target of 20.67. This suggests that WDC 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 2.00 for WDC and 2.10 for PSTG, which implies that analysts are more bullish on the outlook for PSTG.
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. WDC has a short ratio of 2.66 compared to a short interest of 7.00 for PSTG. This implies that the market is currently less bearish on the outlook for WDC.
Western Digital Corporation (NASDAQ:WDC) beats Pure Storage, Inc. (NYSE:PSTG) on a total of 11 of the 14 factors compared between the two stocks. WDC is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, WDC is the cheaper of the two stocks on an earnings, book value and sales basis, WDC is more undervalued relative to its price target. Finally, WDC has better sentiment signals based on short interest.