Comparing Pure Storage, Inc. (PSTG) and NetApp, Inc. (NTAP)
#Pure Storage, Inc. (NYSE:PSTG) shares are up more than 56.14% this year and recently decreased -7.15% or -$1.36 to settle at $17.66. #NetApp, Inc. (NASDAQ:NTAP), on the other hand, is up 59.43% year to date as of 11/28/2017. It currently trades at $56.23 and has returned 2.09% during the past week. @Pure Storage, Inc. (NYSE:PSTG) and @NetApp, Inc. (NASDAQ:NTAP) are the two most active stocks in the #DataStorage 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 Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect PSTG to grow earnings at a 40.00% annual rate over the next 5 years. Comparatively, NTAP is expected to grow at a 14.68% annual rate. All else equal, PSTG’s higher growth rate would imply a greater potential for capital appreciation. ￼ Profitability and Returns Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 16.99% for NetApp, Inc. (NTAP). PSTG’s ROI is -51.60% while NTAP has a ROI of 10.70%. The interpretation is that NTAP’s business generates a higher return on investment than PSTG’s. Cash Flow ￼ Cash is king when it comes to investing. PSTG’s free cash flow (“FCF”) per share for the trailing twelve months was -0.08. Comparatively, NTAP’s free cash flow per share was +0.84. On a percent-of-sales basis, PSTG’s free cash flow was -0% while NTAP converted 4.11% 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 measure a company’s ability to meet short-term obligations and longer-term debts. PSTG has a current ratio of 2.70 compared to 1.50 for NTAP. This means that PSTG can more easily cover its most immediate liabilities over the next twelve months. PSTG’s debt-to-equity ratio is 0.00 versus a D/E of 0.86 for NTAP. NTAP is therefore the more solvent of the two companies, and has lower financial risk. Valuation PSTG trades at a forward P/E of 464.74, a P/B of 7.65, and a P/S of 4.44, compared to a forward P/E of 15.46, a P/B of 5.49, and a P/S of 2.70 for NTAP. PSTG 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 Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. PSTG is currently priced at a 0.57% to its one-year price target of 17.56. Comparatively, NTAP is 0.82% relative to its price target of 55.77. This suggests that PSTG is the better investment over the next year. The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for PSTG and 2.50 for NTAP, which implies that analysts are more bullish on the outlook for NTAP. 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. PSTG has a short ratio of 7.49 compared to a short interest of 4.54 for NTAP. This implies that the market is currently less bearish on the outlook for NTAP. Summary NetApp, Inc. (NASDAQ:NTAP) beats Pure Storage, Inc. (NYSE:PSTG) on a total of 8 of the 14 factors compared between the two stocks. NTAP is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, NTAP is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, NTAP has better sentiment signals based on short interest.