Global

Choosing Between Amazon.com, Inc. (AMZN) and Ciena Corporation (CIEN)

Amazon.com, Inc. (NASDAQ:AMZN) shares are up more than 23.26% this year and recently increased 0.75% or $10.71 to settle at $1441.50. Ciena Corporation (NYSE:CIEN), on the other hand, is up 22.79% year to date as of 04/16/2018. It currently trades at $25.70 and has returned 2.35% during the past week.

Amazon.com, Inc. (NASDAQ:AMZN) and Ciena Corporation (NYSE:CIEN) are the two most active stocks in the Catalog & Mail Order Houses 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.

Growth

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 AMZN to grow earnings at a 20.48% annual rate over the next 5 years. Comparatively, CIEN is expected to grow at a 12.84% annual rate. All else equal, AMZN’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., compared to an EBITDA margin of 10.34% for Ciena Corporation (CIEN). AMZN’s ROI is 3.60% while CIEN has a ROI of 41.80%. The interpretation is that CIEN’s business generates a higher return on investment than AMZN’s.

Cash Flow



Cash is king when it comes to investing. AMZN’s free cash flow (“FCF”) per share for the trailing twelve months was +14.94. Comparatively, CIEN’s free cash flow per share was +0.07. On a percent-of-sales basis, AMZN’s free cash flow was 4.07% while CIEN converted 0.36% of its revenues into cash flow. This means that, for a given level of sales, AMZN is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. AMZN has a current ratio of 1.00 compared to 2.10 for CIEN. This means that CIEN can more easily cover its most immediate liabilities over the next twelve months. AMZN’s debt-to-equity ratio is 1.11 versus a D/E of 0.54 for CIEN. AMZN is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

AMZN trades at a forward P/E of 93.70, a P/B of 25.13, and a P/S of 3.97, compared to a forward P/E of 14.37, a P/B of 2.11, and a P/S of 1.31 for CIEN. AMZN 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. AMZN is currently priced at a -13.72% to its one-year price target of 1670.66. Comparatively, CIEN is -15.21% relative to its price target of 30.31. This suggests that CIEN is the better investment over the next year.

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. AMZN has a beta of 1.62 and CIEN’s beta is 1.39. CIEN’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. AMZN has a short ratio of 0.64 compared to a short interest of 4.80 for CIEN. This implies that the market is currently less bearish on the outlook for AMZN.

Summary

Ciena Corporation (NYSE:CIEN) beats Amazon.com, Inc. (NASDAQ:AMZN) on a total of 9 of the 14 factors compared between the two stocks. CIEN is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, CIEN is the cheaper of the two stocks on an earnings, book value and sales basis, CIEN is more undervalued relative to its price target. Finally, MU has better sentiment signals based on short interest.

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