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Should You Buy Glu Mobile Inc. (GLUU) or 22nd Century Group, Inc. (XXII)?

Glu Mobile Inc. (NASDAQ:GLUU) shares are up more than 103.30% this year and recently increased 0.54% or $0.04 to settle at $7.40. 22nd Century Group, Inc. (NYSE:XXII), on the other hand, is up 1.07% year to date as of 09/11/2018. It currently trades at $2.83 and has returned 3.28% during the past week.

Glu Mobile Inc. (NASDAQ:GLUU) and 22nd Century Group, Inc. (NYSE:XXII) 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 grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect GLUU to grow earnings at a 15.00% annual rate over the next 5 years.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use Return on Investment (ROI) as measures of profitability and return. GLUU’s ROI is -81.60% while XXII has a ROI of -17.60%. The interpretation is that XXII’s business generates a higher return on investment than GLUU’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. GLUU’s free cash flow (“FCF”) per share for the trailing twelve months was +0.08. Comparatively, XXII’s free cash flow per share was -0.04. On a percent-of-sales basis, GLUU’s free cash flow was 0% while XXII converted -0.03% of its revenues into cash flow. This means that, for a given level of sales, GLUU is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. GLUU has a current ratio of 1.20 compared to 10.20 for XXII. This means that XXII can more easily cover its most immediate liabilities over the next twelve months. GLUU’s debt-to-equity ratio is 0.00 versus a D/E of 0.01 for XXII. XXII is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

GLUU trades at a forward P/E of 21.26, a P/B of 6.32, and a P/S of 3.09, compared to a P/B of 4.88, and a P/S of 14.47 for XXII. GLUU is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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

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. GLUU is currently priced at a 1.51% to its one-year price target of 7.29. Comparatively, XXII is -75.39% relative to its price target of 11.50. This suggests that XXII 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. GLUU has a beta of 1.15 and XXII’s beta is 2.28. GLUU’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. GLUU has a short ratio of 2.00 compared to a short interest of 7.94 for XXII. This implies that the market is currently less bearish on the outlook for GLUU.

Summary

Glu Mobile Inc. (NASDAQ:GLUU) beats 22nd Century Group, Inc. (NYSE:XXII) on a total of 7 of the 14 factors compared between the two stocks. GLUU is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, GLUU has better sentiment signals based on short interest.

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