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Real Goods Solar, Inc. (RGSE) vs. PayPal Holdings, Inc. (PYPL): Comparing the Most Active Stocks

Real Goods Solar, Inc. (NASDAQ:RGSE) shares are down more than -63.57% this year and recently decreased -4.43% or -$0.02 to settle at $0.54. PayPal Holdings, Inc. (NASDAQ:PYPL), on the other hand, is up 14.36% year to date as of 12/04/2018. It currently trades at $84.19 and has returned 2.71% during the past week.

Real Goods Solar, Inc. (NASDAQ:RGSE) and PayPal Holdings, Inc. (NASDAQ:PYPL) are the two most active stocks based on recent 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

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Comparatively, PYPL is expected to grow at a 20.51% annual rate. All else equal, PYPL’s higher growth rate would imply a greater potential for capital appreciation.

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 EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 22.43% for PayPal Holdings, Inc. (PYPL).

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. RGSE’s free cash flow (“FCF”) per share for the trailing twelve months was -0.09. Comparatively, PYPL’s free cash flow per share was +3.71. On a percent-of-sales basis, RGSE’s free cash flow was -0.05% while PYPL converted 33.39% of its revenues into cash flow. This means that, for a given level of sales, PYPL is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. RGSE has a current ratio of 1.70 compared to 1.30 for PYPL. This means that RGSE can more easily cover its most immediate liabilities over the next twelve months. RGSE’s debt-to-equity ratio is 0.03 versus a D/E of 0.13 for PYPL. PYPL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

RGSE trades at a P/B of 3.00, and a P/S of 2.82, compared to a forward P/E of 29.18, a P/B of 6.58, and a P/S of 6.51 for PYPL. RGSE is the cheaper 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. RGSE is currently priced at a -73% to its one-year price target of 2.00. Comparatively, PYPL is -15.45% relative to its price target of 99.58. This suggests that RGSE is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. RGSE has a beta of 1.45 and PYPL’s beta is 1.23. PYPL’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. RGSE has a short ratio of 0.07 compared to a short interest of 1.49 for PYPL. This implies that the market is currently less bearish on the outlook for RGSE.

Summary

Real Goods Solar, Inc. (NASDAQ:RGSE) beats PayPal Holdings, Inc. (NASDAQ:PYPL) on a total of 8 of the 14 factors compared between the two stocks. RGSE higher liquidity and has lower financial risk. In terms of valuation, RGSE is the cheaper of the two stocks on an earnings, book value and sales basis, RGSE is more undervalued relative to its price target. Finally, RGSE has better sentiment signals based on short interest.

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