Facebook, Inc. (NASDAQ:FB) shares are up more than 1.73% this year and recently increased 3.68% or $6.37 to settle at $179.52. AT&T Inc. (NYSE:T), on the other hand, is down -6.35% year to date as of 02/14/2018. It currently trades at $36.41 and has returned -1.41% during the past week.
Facebook, Inc. (NASDAQ:FB) and AT&T Inc. (NYSE:T) are the two most active stocks in the market based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect FB to grow earnings at a 27.18% annual rate over the next 5 years. Comparatively, T is expected to grow at a 9.39% annual rate. All else equal, FB’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 30.9% for AT&T Inc. (T). FB’s ROI is 20.90% while T has a ROI of 7.20%. The interpretation is that FB’s business generates a higher return on investment than T’s.
The value of a stock is simply the present value of its future free cash flows. FB’s free cash flow (“FCF”) per share for the trailing twelve months was +1.83. Comparatively, T’s free cash flow per share was +0.29. On a percent-of-sales basis, FB’s free cash flow was 13.08% while T converted 1.11% of its revenues into cash flow. This means that, for a given level of sales, FB 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. FB has a current ratio of 12.90 compared to 1.60 for T. This means that FB can more easily cover its most immediate liabilities over the next twelve months. FB’s debt-to-equity ratio is 0.00 versus a D/E of 1.31 for T. T is therefore the more solvent of the two companies, and has lower financial risk.
FB trades at a forward P/E of 20.31, a P/B of 7.03, and a P/S of 12.50, compared to a forward P/E of 10.61, a P/B of 1.80, and a P/S of 1.40 for T. FB 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. FB is currently priced at a -19.43% to its one-year price target of 222.81. Comparatively, T is -10.43% relative to its price target of 40.65. This suggests that FB 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 1.80 for FB and 2.50 for T, which implies that analysts are more bullish on the outlook for T.
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. FB has a beta of 0.71 and T’s beta is 0.39. T’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. FB has a short ratio of 1.03 compared to a short interest of 5.61 for T. This implies that the market is currently less bearish on the outlook for FB.
Facebook, Inc. (NASDAQ:FB) beats AT&T Inc. (NYSE:T) on a total of 10 of the 14 factors compared between the two stocks. FB is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. FB is more undervalued relative to its price target. Finally, FB has better sentiment signals based on short interest.