NVIDIA Corporation (NASDAQ:NVDA) and Sunworks, Inc. (NASDAQ:SUNW) are the two most active stocks in the Semiconductor – Specialized 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 grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect NVDA to grow earnings at a 12.92% annual rate over the next 5 years. Comparatively, SUNW is expected to grow at a 10.00% annual rate. All else equal, NVDA’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use Return on Investment (ROI) to measure this. NVDA’s ROI is 19.80% while SUNW has a ROI of -34.00%. The interpretation is that NVDA’s business generates a higher return on investment than SUNW’s.
Cash is king when it comes to investing. NVDA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.90. Comparatively, SUNW’s free cash flow per share was +0.01. On a percent-of-sales basis, NVDA’s free cash flow was 7.81% while SUNW converted 0% of its revenues into cash flow. This means that, for a given level of sales, NVDA 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. NVDA has a current ratio of 7.80 compared to 1.40 for SUNW. This means that NVDA can more easily cover its most immediate liabilities over the next twelve months. NVDA’s debt-to-equity ratio is 0.35 versus a D/E of 0.11 for SUNW. NVDA is therefore the more solvent of the two companies, and has lower financial risk.
NVDA trades at a forward P/E of 45.56, a P/B of 18.06, and a P/S of 12.77, compared to a forward P/E of 12.36, a P/B of 1.74, and a P/S of 0.43 for SUNW. NVDA 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
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. NVDA is currently priced at a 12.29% to its one-year price target of $160.98. Comparatively, SUNW is -42.91% relative to its price target of $2.75. This suggests that SUNW 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 2.40 for NVDA and 2.30 for SUNW, which implies that analysts are more bullish on the outlook for NVDA.
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. NVDA has a beta of 1.25 and SUNW’s beta is -1.91. SUNW’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. NVDA has a short ratio of 1.03 compared to a short interest of 3.49 for SUNW. This implies that the market is currently less bearish on the outlook for NVDA.
Sunworks, Inc. (NASDAQ:SUNW) beats NVIDIA Corporation (NASDAQ:NVDA) on a total of 7 of the 14 factors compared between the two stocks. SUNW is growing fastly. In terms of valuation, SUNW is the cheaper of the two stocks on an earnings, book value and sales basis, SUNW is more undervalued relative to its price target. Finally, ADI has better sentiment signals based on short interest.