NetApp, Inc. (NASDAQ:NTAP) shares are up more than 11.73% this year and recently increased 1.91% or $1.16 to settle at $61.81. Teradata Corporation (NYSE:TDC), on the other hand, is down -0.73% year to date as of 01/11/2018. It currently trades at $38.18 and has returned -1.22% during the past week.
NetApp, Inc. (NASDAQ:NTAP) and Teradata Corporation (NYSE:TDC) are the two most active stocks in the Data Storage Devices industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
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 NTAP to grow earnings at a 14.68% annual rate over the next 5 years. Comparatively, TDC is expected to grow at a 2.53% annual rate. All else equal, NTAP’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 11.09% for Teradata Corporation (TDC). NTAP’s ROI is 10.70% while TDC has a ROI of 8.80%. The interpretation is that NTAP’s business generates a higher return on investment than TDC’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. NTAP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.84. Comparatively, TDC’s free cash flow per share was -0.29. On a percent-of-sales basis, NTAP’s free cash flow was 4.06% while TDC converted -1.51% of its revenues into cash flow. This means that, for a given level of sales, NTAP 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. NTAP has a current ratio of 1.70 compared to 1.60 for TDC. This means that NTAP can more easily cover its most immediate liabilities over the next twelve months. NTAP’s debt-to-equity ratio is 1.08 versus a D/E of 1.01 for TDC. NTAP is therefore the more solvent of the two companies, and has lower financial risk.
NTAP trades at a forward P/E of 17.01, a P/B of 5.99, and a P/S of 2.95, compared to a forward P/E of 27.23, a P/B of 6.57, and a P/S of 2.13 for TDC. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. NTAP is currently priced at a 10.57% to its one-year price target of 55.90. Comparatively, TDC is 12.2% relative to its price target of 34.03. This suggests that NTAP 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 2.50 for NTAP and 3.40 for TDC, which implies that analysts are more bullish on the outlook for TDC.
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. NTAP has a beta of 1.28 and TDC’s beta is 1.23. TDC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.NTAP has a short ratio of 4.73 compared to a short interest of 15.29 for TDC. This implies that the market is currently less bearish on the outlook for NTAP.
NetApp, Inc. (NASDAQ:NTAP) beats Teradata Corporation (NYSE:TDC) on a total of 11 of the 14 factors compared between the two stocks. NTAP is growing fastly, 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, NTAP is the cheaper of the two stocks on an earnings and book value, NTAP is more undervalued relative to its price target. Finally, NTAP has better sentiment signals based on short interest.