Cognizant Technology Solutions Corporation (NASDAQ:CTSH) shares are up more than 6.70% this year and recently increased 0.52% or $0.39 to settle at $75.78. GameStop Corp. (NYSE:GME), on the other hand, is down -24.12% year to date as of 05/17/2018. It currently trades at $13.62 and has returned 4.53% during the past week.
Cognizant Technology Solutions Corporation (NASDAQ:CTSH) and GameStop Corp. (NYSE:GME) are the two most active stocks in the Information Technology Services industry 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.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 CTSH to grow earnings at a 13.54% annual rate over the next 5 years. Comparatively, GME is expected to grow at a 12.00% annual rate. All else equal, CTSH’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 3.13% for GameStop Corp. (GME). CTSH’s ROI is 16.90% while GME has a ROI of 4.40%. The interpretation is that CTSH’s business generates a higher return on investment than GME’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. CTSH’s free cash flow (“FCF”) per share for the trailing twelve months was +0.30. Comparatively, GME’s free cash flow per share was +3.80. On a percent-of-sales basis, CTSH’s free cash flow was 1.19% while GME converted 4.17% 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
Balance sheet risk is one of the biggest factors to consider before investing. CTSH has a current ratio of 3.60 compared to 1.30 for GME. This means that CTSH can more easily cover its most immediate liabilities over the next twelve months. CTSH’s debt-to-equity ratio is 0.07 versus a D/E of 0.00 for GME. CTSH is therefore the more solvent of the two companies, and has lower financial risk.Valuation
CTSH trades at a forward P/E of 14.88, a P/B of 4.05, and a P/S of 2.93, compared to a forward P/E of 4.74, a P/B of 0.62, and a P/S of 0.15 for GME. CTSH 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. CTSH is currently priced at a -15.94% to its one-year price target of 90.15. Comparatively, GME is -12.47% relative to its price target of 15.56. This suggests that CTSH is the better investment over the next year.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. CTSH has a beta of 1.03 and GME’s beta is 1.25. CTSH’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. CTSH has a short ratio of 2.47 compared to a short interest of 9.24 for GME. This implies that the market is currently less bearish on the outlook for CTSH.Summary
Cognizant Technology Solutions Corporation (NASDAQ:CTSH) beats GameStop Corp. (NYSE:GME) on a total of 8 of the 14 factors compared between the two stocks. CTSH is growing fastly, is more profitable, generates a higher return on investment and higher liquidity. CTSH is more undervalued relative to its price target. Finally, CTSH has better sentiment signals based on short interest.