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Critical Comparison: Hewlett Packard Enterprise Company (HPE) vs. Zillow Group, Inc. (Z)

Hewlett Packard Enterprise Company (NYSE:HPE) shares are up more than 22.28% this year and recently increased 0.92% or $0.16 to settle at $17.56. Zillow Group, Inc. (NASDAQ:Z), on the other hand, is up 21.24% year to date as of 04/16/2018. It currently trades at $49.61 and has returned -4.12% during the past week.

Hewlett Packard Enterprise Company (NYSE:HPE) and Zillow Group, Inc. (NASDAQ:Z) are the two most active stocks in the Diversified Computer Systems 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

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect HPE to grow earnings at a -7.77% annual rate over the next 5 years.

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. Hewlett Packard Enterprise Company (HPE) has an EBITDA margin of 8.42%. This suggests that HPE underlying business is more profitable

Cash Flow



The value of a stock is simply the present value of its future free cash flows. HPE’s free cash flow (“FCF”) per share for the trailing twelve months was -0.40. Comparatively, Z’s free cash flow per share was +0.35. On a percent-of-sales basis, HPE’s free cash flow was -2.17% while Z converted 6.19% of its revenues into cash flow. This means that, for a given level of sales, Z is able to generate more free cash flow for investors.

Valuation

HPE trades at a forward P/E of 11.82, a P/B of 1.17, and a P/S of 0.94, compared to a forward P/E of 41.69, a P/B of 3.54, and a P/S of 5.88 for Z. HPE is the cheaper 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

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. HPE is currently priced at a -8.21% to its one-year price target of 19.13. Comparatively, Z is -4.96% relative to its price target of 52.20. This suggests that HPE is the better investment over the next year.

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. HPE has a short ratio of 1.51 compared to a short interest of 9.45 for Z. This implies that the market is currently less bearish on the outlook for HPE.

Summary

Hewlett Packard Enterprise Company (NYSE:HPE) beats Zillow Group, Inc. (NASDAQ:Z) on a total of 8 of the 14 factors compared between the two stocks. HPE is more profitable, generates a higher return on investment and higher liquidity. In terms of valuation, HPE is the cheaper of the two stocks on an earnings, book value and sales basis, HPE is more undervalued relative to its price target. Finally, HPE has better sentiment signals based on short interest.

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