Snap Inc. (NYSE:SNAP) shares are down more than -38.24% this year and recently increased 1.96% or $0.29 to settle at $15.12. Square, Inc. (NYSE:SQ), on the other hand, is up 169.70% year to date as of 11/06/2017. It currently trades at $36.76 and has returned -1.16% during the past week.
Snap Inc. (NYSE:SNAP) and Square, Inc. (NYSE:SQ) are the two most active stocks in the Internet Software & Services industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
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 SNAP to grow earnings at a 70.00% annual rate over the next 5 years. Comparatively, SQ is expected to grow at a 20.00% annual rate. All else equal, SNAP’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 Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. SNAP’s ROI is -33.50% while SQ has a ROI of -29.90%. The interpretation is that SQ’s business generates a higher return on investment than SNAP’s.
Cash is king when it comes to investing. SNAP’s free cash flow (“FCF”) per share for the trailing twelve months was -0.19. Comparatively, SQ’s free cash flow per share was +0.10.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. SNAP has a current ratio of 11.80 compared to 2.30 for SQ. This means that SNAP can more easily cover its most immediate liabilities over the next twelve months. SNAP’s debt-to-equity ratio is 0.00 versus a D/E of 0.50 for SQ. SQ is therefore the more solvent of the two companies, and has lower financial risk.
SNAP trades at a P/B of 5.23, and a P/S of 27.59, compared to a forward P/E of 85.89, a P/B of 19.66, and a P/S of 7.24 for SQ. 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. SNAP is currently priced at a 2.3% to its one-year price target of 14.78. Comparatively, SQ is 22.37% relative to its price target of 30.04. This suggests that SNAP 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 2.80 for SNAP and 2.30 for SQ, which implies that analysts are more bullish on the outlook for SNAP.
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. SNAP has a short ratio of 4.38 compared to a short interest of 4.74 for SQ. This implies that the market is currently less bearish on the outlook for SNAP.
Snap Inc. (NYSE:SNAP) beats Square, Inc. (NYSE:SQ) on a total of 7 of the 13 factors compared between the two stocks. SNAP is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, SNAP is the cheaper of the two stocks on an earnings and book value, SNAP is more undervalued relative to its price target. Finally, SNAP has better sentiment signals based on short interest.