Dermira, Inc. (NASDAQ:DERM) shares are down more than -63.14% this year and recently decreased -1.63% or -$0.17 to settle at $10.25. GameStop Corp. (NYSE:GME), on the other hand, is down -13.04% year to date as of 03/13/2018. It currently trades at $15.61 and has returned -2.80% during the past week.
Dermira, Inc. (NASDAQ:DERM) and GameStop Corp. (NYSE:GME) are the two most active stocks in the market 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. Comparatively, GME is expected to grow at a 12.00% annual rate. All else equal, GME’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. EBITDA margin of 7.69% for GameStop Corp. (GME). DERM’s ROI is -70.00% while GME has a ROI of 13.20%. The interpretation is that GME’s business generates a higher return on investment than DERM’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. DERM’s free cash flow (“FCF”) per share for the trailing twelve months was -0.78. Comparatively, GME’s free cash flow per share was +2.14. On a percent-of-sales basis, DERM’s free cash flow was -0.72% while GME converted 2.52% of its revenues into cash flow. This means that, for a given level of sales, GME 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. DERM has a current ratio of 5.30 compared to 1.20 for GME. This means that DERM can more easily cover its most immediate liabilities over the next twelve months. DERM’s debt-to-equity ratio is 1.87 versus a D/E of 0.00 for GME. DERM is therefore the more solvent of the two companies, and has lower financial risk.
DERM trades at a P/B of 2.86, and a P/S of 91.23, compared to a forward P/E of 4.70, a P/B of 0.68, and a P/S of 0.18 for GME. DERM is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. DERM is currently priced at a -63.06% to its one-year price target of 27.75. Comparatively, GME is -23.48% relative to its price target of 20.40. This suggests that DERM 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 DERM and 2.60 for GME, which implies that analysts are more bullish on the outlook for GME.
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. DERM has a beta of 0.85 and GME’s beta is 1.21. DERM’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. DERM has a short ratio of 3.23 compared to a short interest of 9.68 for GME. This implies that the market is currently less bearish on the outlook for DERM.
GameStop Corp. (NYSE:GME) beats Dermira, Inc. (NASDAQ:DERM) on a total of 8 of the 14 factors compared between the two stocks. GME higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, GME is the cheaper of the two stocks on book value and sales basis, Finally, EA has better sentiment signals based on short interest.