Take-Two Interactive Software, Inc. (NASDAQ:TTWO) shares are up more than 3.73% this year and recently increased 0.72% or $0.81 to settle at $113.88. PepsiCo, Inc. (NASDAQ:PEP), on the other hand, is down -18.35% year to date as of 05/17/2018. It currently trades at $97.92 and has returned 0.67% during the past week.

Take-Two Interactive Software, Inc. (NASDAQ:TTWO) and PepsiCo, Inc. (NASDAQ:PEP) are the two most active stocks in the Multimedia & Graphics Software industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

**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 TTWO to grow earnings at a 29.87% annual rate over the next 5 years. Comparatively, PEP is expected to grow at a 7.69% annual rate. All else equal, TTWO’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 20.06% for PepsiCo, Inc. (PEP). TTWO’s ROI is 6.50% while PEP has a ROI of 16.40%. The interpretation is that PEP’s business generates a higher return on investment than TTWO’s.

**Cash Flow**

Earnings don’t always accurately reflect the amount of cash that a company brings in. TTWO’s free cash flow (“FCF”) per share for the trailing twelve months was +0.80. Comparatively, PEP’s free cash flow per share was -1.97. On a percent-of-sales basis, TTWO’s free cash flow was 5.14% while PEP converted -4.4% of its revenues into cash flow. This means that, for a given level of sales, TTWO is able to generate more free cash flow for investors.

**Liquidity and Financial Risk**

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. TTWO has a current ratio of 1.20 compared to 1.30 for PEP. This means that PEP can more easily cover its most immediate liabilities over the next twelve months. TTWO’s debt-to-equity ratio is 0.01 versus a D/E of 4.00 for PEP. PEP is therefore the more solvent of the two companies, and has lower financial risk.

**Valuation**

TTWO trades at a forward P/E of 23.30, a P/B of 9.24, and a P/S of 6.80, compared to a forward P/E of 16.00, a P/B of 12.78, and a P/S of 2.17 for PEP. TTWO is the cheaper of the two stocks on book value basis but is expensive in terms of P/E 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

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. TTWO is currently priced at a -12.5% to its one-year price target of 130.15. Comparatively, PEP is -16.43% relative to its price target of 117.17. This suggests that PEP 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. TTWO has a beta of 1.09 and PEP’s beta is 0.67. PEP’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. TTWO has a short ratio of 1.16 compared to a short interest of 1.65 for PEP. This implies that the market is currently less bearish on the outlook for TTWO.

**Summary**

PepsiCo, Inc. (NASDAQ:PEP) beats Take-Two Interactive Software, Inc. (NASDAQ:TTWO) on a total of 7 of the 14 factors compared between the two stocks. PEP is growing fastly, generates a higher return on investment and higher liquidity. In terms of valuation, PEP is the cheaper of the two stocks on an earnings and sales basis, PEP is more undervalued relative to its price target. Finally, MO has better sentiment signals based on short interest.