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A Side-by-side Analysis of Facebook, Inc. (FB) and Ally Financial Inc. (ALLY)

Facebook, Inc. (NASDAQ:FB) shares are down more than -8.56% this year and recently decreased -0.40% or -$0.64 to settle at $161.36. Ally Financial Inc. (NYSE:ALLY), on the other hand, is down -8.95% year to date as of 09/13/2018. It currently trades at $26.55 and has returned -0.82% during the past week.

Facebook, Inc. (NASDAQ:FB) and Ally Financial Inc. (NYSE:ALLY) are the two most active stocks in the Internet Information Providers 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

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect FB to grow earnings at a 22.20% annual rate over the next 5 years. Comparatively, ALLY is expected to grow at a 15.60% annual rate. All else equal, FB’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 138.46% for Ally Financial Inc. (ALLY). FB’s ROI is 24.00% while ALLY has a ROI of 6.70%. The interpretation is that FB’s business generates a higher return on investment than ALLY’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. On a percent-of-sales basis, FB’s free cash flow was 0% while ALLY converted -2.78% of its revenues into cash flow. This means that, for a given level of sales, FB is able to generate more free cash flow for investors.

Liquidity and Financial Risk

FB’s debt-to-equity ratio is 0.00 versus a D/E of 3.60 for ALLY. ALLY is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

FB trades at a forward P/E of 19.35, a P/B of 5.88, and a P/S of 9.58, compared to a forward P/E of 7.50, a P/B of 0.87, and a P/S of 1.32 for ALLY. FB 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

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. FB is currently priced at a -23.54% to its one-year price target of 211.03. Comparatively, ALLY is -20.91% relative to its price target of 33.57. This suggests that FB 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. FB has a beta of 0.45 and ALLY’s beta is 1.29. FB’s shares are therefore the less volatile of the two stocks.

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. FB has a short ratio of 1.08 compared to a short interest of 5.43 for ALLY. This implies that the market is currently less bearish on the outlook for FB.

Summary




Facebook, Inc. (NASDAQ:FB) beats Ally Financial Inc. (NYSE:ALLY) on a total of 10 of the 14 factors compared between the two stocks. FB is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. FB is more undervalued relative to its price target. Finally, FB has better sentiment signals based on short interest.

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