Splunk Inc. (NASDAQ:SPLK) shares are up more than 10.37% this year and recently increased 0.95% or $0.86 to settle at $91.43. Progress Software Corporation (NASDAQ:PRGS), on the other hand, is up 20.51% year to date as of 01/18/2018. It currently trades at $51.30 and has returned 17.47% during the past week.
Splunk Inc. (NASDAQ:SPLK) and Progress Software Corporation (NASDAQ:PRGS) are the two most active stocks in the Application Software industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect SPLK to grow earnings at a 45.23% annual rate over the next 5 years. Comparatively, PRGS is expected to grow at a 10.00% annual rate. All else equal, SPLK’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. EBITDA margin of 4.83% for Progress Software Corporation (PRGS). SPLK’s ROI is -43.40% while PRGS has a ROI of -9.30%. The interpretation is that PRGS’s business generates a higher return on investment than SPLK’s.
The value of a stock is simply the present value of its future free cash flows. SPLK’s free cash flow (“FCF”) per share for the trailing twelve months was +0.33. Comparatively, PRGS’s free cash flow per share was +0.50. On a percent-of-sales basis, SPLK’s free cash flow was 0% while PRGS converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, PRGS 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. SPLK has a current ratio of 1.90 compared to 1.30 for PRGS. This means that SPLK can more easily cover its most immediate liabilities over the next twelve months. SPLK’s debt-to-equity ratio is 0.00 versus a D/E of 0.31 for PRGS. PRGS is therefore the more solvent of the two companies, and has lower financial risk.
SPLK trades at a forward P/E of 107.56, a P/B of 16.62, and a P/S of 11.18, compared to a forward P/E of 27.24, a P/B of 6.29, and a P/S of 6.08 for PRGS. SPLK 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. SPLK is currently priced at a 6.79% to its one-year price target of 85.62. Comparatively, PRGS is 23.11% relative to its price target of 41.67. This suggests that SPLK 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 SPLK and 2.80 for PRGS, which implies that analysts are more bullish on the outlook for PRGS.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. SPLK has a beta of 2.04 and PRGS’s beta is 0.57. PRGS’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. SPLK has a short ratio of 5.14 compared to a short interest of 2.12 for PRGS. This implies that the market is currently less bearish on the outlook for PRGS.
Progress Software Corporation (NASDAQ:PRGS) beats Splunk Inc. (NASDAQ:SPLK) on a total of 9 of the 14 factors compared between the two stocks. PRGS is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, PRGS is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, PRGS has better sentiment signals based on short interest.