Applied Materials, Inc. (NASDAQ:AMAT) shares are up more than 45.24% this year and recently decreased -1.90% or -$0.92 to settle at $47.55. The Gap, Inc. (NYSE:GPS), on the other hand, is down -29.97% year to date as of 08/02/2019. It currently trades at $18.04 and has returned -7.68% during the past week.
Applied Materials, Inc. (NASDAQ:AMAT) and The Gap, Inc. (NYSE:GPS) are the two most active stocks in the Semiconductor Equipment & Materials industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect AMAT to grow earnings at a 8.50% annual rate over the next 5 years. Comparatively, GPS is expected to grow at a 3.92% annual rate. All else equal, AMAT’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 12.47% for The Gap, Inc. (GPS). AMAT’s ROI is 37.20% while GPS has a ROI of 22.40%. The interpretation is that AMAT’s business generates a higher return on investment than GPS’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. AMAT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.52. Comparatively, GPS’s free cash flow per share was -1.50. On a percent-of-sales basis, AMAT’s free cash flow was 2.82% while GPS converted -3.42% of its revenues into cash flow. This means that, for a given level of sales, AMAT 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. AMAT has a current ratio of 2.80 compared to 1.50 for GPS. This means that AMAT can more easily cover its most immediate liabilities over the next twelve months. AMAT’s debt-to-equity ratio is 0.65 versus a D/E of 0.35 for GPS. AMAT is therefore the more solvent of the two companies, and has lower financial risk.
AMAT trades at a forward P/E of 13.06, a P/B of 5.46, and a P/S of 2.88, compared to a forward P/E of 8.40, a P/B of 1.92, and a P/S of 0.41 for GPS. AMAT 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
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”. AMAT is currently priced at a -7.63% to its one-year price target of 51.48. Comparatively, GPS is -16.94% relative to its price target of 21.72. This suggests that GPS 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. AMAT has a beta of 1.66 and GPS’s beta is 0.66. GPS’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. AMAT has a short ratio of 1.76 compared to a short interest of 5.47 for GPS. This implies that the market is currently less bearish on the outlook for AMAT.
Applied Materials, Inc. (NASDAQ:AMAT) beats The Gap, Inc. (NYSE:GPS) on a total of 8 of the 14 factors compared between the two stocks. AMAT is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. Finally, AMAT has better sentiment signals based on short interest.