Square, Inc. (NYSE:SQ) shares are up more than 35.65% this year and recently decreased -0.99% or -$0.47 to settle at $47.03. DST Systems, Inc. (NYSE:DST), on the other hand, is up 35.31% year to date as of 04/16/2018. It currently trades at $83.99 and has returned 0.42% during the past week.
Square, Inc. (NYSE:SQ) and DST Systems, Inc. (NYSE:DST) are the two most active stocks in the Internet Software & Services 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 grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect SQ to grow earnings at a 59.22% annual rate over the next 5 years. Comparatively, DST is expected to grow at a 10.00% annual rate. All else equal, SQ’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 30.96% for DST Systems, Inc. (DST). SQ’s ROI is -4.80% while DST has a ROI of 10.10%. The interpretation is that DST’s business generates a higher return on investment than SQ’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. SQ’s free cash flow (“FCF”) per share for the trailing twelve months was -0.02. Comparatively, DST’s free cash flow per share was +0.63. On a percent-of-sales basis, SQ’s free cash flow was -0.36% while DST converted 1.68% of its revenues into cash flow. This means that, for a given level of sales, DST is able to generate more free cash flow for investors.Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. SQ has a current ratio of 1.80 compared to 1.10 for DST. This means that SQ can more easily cover its most immediate liabilities over the next twelve months. SQ’s debt-to-equity ratio is 0.46 versus a D/E of 0.50 for DST. DST is therefore the more solvent of the two companies, and has lower financial risk.Valuation
SQ trades at a forward P/E of 61.56, a P/B of 23.28, and a P/S of 8.81, compared to a forward P/E of 18.71, a P/B of 4.05, and a P/S of 2.25 for DST. SQ 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. SQ is currently priced at a -3.96% to its one-year price target of 48.97. Comparatively, DST is 4.66% relative to its price target of 80.25. This suggests that SQ is the better investment over the next year.
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. SQ has a short ratio of 2.38 compared to a short interest of 2.05 for DST. This implies that the market is currently less bearish on the outlook for DST.Summary
DST Systems, Inc. (NYSE:DST) beats Square, Inc. (NYSE:SQ) on a total of 8 of the 14 factors compared between the two stocks. DST 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, DST is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, DST has better sentiment signals based on short interest.