Finance

Comparing NetApp, Inc. (NTAP) and Electronic Arts Inc. (EA)

NetApp, Inc. (NASDAQ:NTAP) shares are up more than 43.73% this year and recently decreased -3.59% or -$2.96 to settle at $79.51. Electronic Arts Inc. (NASDAQ:EA), on the other hand, is up 23.46% year to date as of 08/16/2018. It currently trades at $129.71 and has returned 1.48% during the past week.

NetApp, Inc. (NASDAQ:NTAP) and Electronic Arts Inc. (NASDAQ:EA) are the two most active stocks in the Data Storage Devices 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 NTAP to grow earnings at a 15.00% annual rate over the next 5 years. Comparatively, EA is expected to grow at a 15.14% annual rate. All else equal, EA’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 24.02% for Electronic Arts Inc. (EA). NTAP’s ROI is 22.40% while EA has a ROI of 22.60%. The interpretation is that EA’s business generates a higher return on investment than NTAP’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. NTAP’s free cash flow (“FCF”) per share for the trailing twelve months was +1.44. Comparatively, EA’s free cash flow per share was +0.28. On a percent-of-sales basis, NTAP’s free cash flow was 6.37% while EA converted 1.66% of its revenues into cash flow. This means that, for a given level of sales, NTAP 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. NTAP has a current ratio of 1.90 compared to 3.80 for EA. This means that EA can more easily cover its most immediate liabilities over the next twelve months. NTAP’s debt-to-equity ratio is 0.93 versus a D/E of 0.19 for EA. NTAP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NTAP trades at a forward P/E of 16.85, a P/B of 10.19, and a P/S of 3.56, compared to a forward P/E of 22.89, a P/B of 7.55, and a P/S of 8.20 for EA. 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. NTAP is currently priced at a 0.47% to its one-year price target of 79.14. Comparatively, EA is -16.08% relative to its price target of 154.56. This suggests that EA is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. NTAP has a beta of 1.22 and EA’s beta is 0.62. EA’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. NTAP has a short ratio of 3.79 compared to a short interest of 1.57 for EA. This implies that the market is currently less bearish on the outlook for EA.

Summary

Electronic Arts Inc. (NASDAQ:EA) beats NetApp, Inc. (NASDAQ:NTAP) on a total of 10 of the 14 factors compared between the two stocks. EA has higher cash flow per share, is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. EA is more undervalued relative to its price target. Finally, EA has better sentiment signals based on short interest.

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