NeoPhotonics Corporation (NYSE:NPTN) and Texas Instruments Incorporated (NASDAQ:TXN) are the two most active stocks in the Semiconductor – Broad Line industry based on today’s 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect NPTN to grow earnings at a 15.00% annual rate over the next 5 years. Comparatively, TXN is expected to grow at a 10.48% annual rate. All else equal, NPTN’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. NeoPhotonics Corporation (NPTN) has an EBITDA margin of 0.07%, compared to an EBITDA margin of 48% for Texas Instruments Incorporated (TXN). This suggests that TXN underlying business is more profitable. NPTN’s ROI is -0.20% while TXN has a ROI of 24.60%. The interpretation is that TXN’s business generates a higher return on investment than NPTN’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. NPTN’s free cash flow (“FCF”) per share for the trailing twelve months was -0.34. Comparatively, TXN’s free cash flow per share was +0.26. On a percent-of-sales basis, NPTN’s free cash flow was -0% while TXN converted 1.93% of its revenues into cash flow. This means that, for a given level of sales, TXN is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. NPTN has a current ratio of 1.70 compared to 4.00 for TXN. This means that TXN can more easily cover its most immediate liabilities over the next twelve months. NPTN’s debt-to-equity ratio is 0.19 versus a D/E of 0.33 for TXN. TXN is therefore the more solvent of the two companies, and has lower financial risk.
NPTN trades at a forward P/E of 138.06, a P/B of 1.00, and a P/S of 0.64, compared to a forward P/E of 21.22, a P/B of 8.46, and a P/S of 6.36 for TXN. 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”. NPTN is currently priced at a -46.62% to its one-year price target of $9.31. Comparatively, TXN is 2.8% relative to its price target of $88.66. This suggests that NPTN 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 NPTN and 2.40 for TXN, which implies that analysts are more bullish on the outlook for TXN.
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. NPTN has a beta of 1.24 and TXN’s beta is 1.23. TXN’s shares are therefore the less volatile of the two stocks.
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. NPTN has a short ratio of 8.22 compared to a short interest of 2.63 for TXN. This implies that the market is currently less bearish on the outlook for TXN.
Texas Instruments Incorporated (NASDAQ:TXN) beats NeoPhotonics Corporation (NYSE:NPTN) on a total of 8 of the 14 factors compared between the two stocks. TXN is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. Finally, TXN has better sentiment signals based on short interest.