Lam Research Corporation (NASDAQ:LRCX) and Teradyne, Inc. (NYSE:TER) are the two most active stocks in the Semiconductor Equipment & Materials industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

**Growth**

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect LRCX to grow earnings at a 20.90% annual rate over the next 5 years. Comparatively, TER is expected to grow at a 14.30% annual rate. All else equal, LRCX’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 EBITDA margin and Return on Investment (ROI) to measure this. Lam Research Corporation (LRCX) has an EBITDA margin of 26.75%, compared to an EBITDA margin of 27.58% for Teradyne, Inc. (TER). This suggests that TER underlying business is more profitable. LRCX’s ROI is 18.10% while TER has a ROI of -2.20%. The interpretation is that LRCX’s business generates a higher return on investment than TER’s.

**Cash Flow **

If there’s one thing investors care more about than earnings, it’s cash flow. LRCX’s free cash flow (“FCF”) per share for the trailing twelve months was +3.33. Comparatively, TER’s free cash flow per share was +0.96. On a percent-of-sales basis, LRCX’s free cash flow was 6.75% while TER converted 10.84% of its revenues into cash flow. This means that, for a given level of sales, TER is able to generate more free cash flow for investors.

**Liquidity and Financial Risk**

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. LRCX has a current ratio of 3.10 compared to 4.70 for TER. This means that TER can more easily cover its most immediate liabilities over the next twelve months. LRCX’s debt-to-equity ratio is 0.42 versus a D/E of 0.18 for TER. LRCX is therefore the more solvent of the two companies, and has lower financial risk.

**Valuation**

LRCX trades at a forward P/E of 13.42, a P/B of 4.35, and a P/S of 3.70, compared to a forward P/E of 17.64, a P/B of 3.66, and a P/S of 3.86 for TER. 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**

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. LRCX is currently priced at a -4.52% to its one-year price target of $191.47. Comparatively, TER is -4.75% relative to its price target of $39.60. This suggests that TER 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 2.00 for LRCX and 2.10 for TER, which implies that analysts are more bullish on the outlook for TER.

**Risk and Volatility**

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. LRCX has a beta of 1.53 and TER’s beta is 0.97. TER’s shares are therefore the less volatile of the two stocks.

**Insider Activity and Investor Sentiment**

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. LRCX has a short ratio of 4.92 compared to a short interest of 3.30 for TER. This implies that the market is currently less bearish on the outlook for TER.

**Summary**

Teradyne, Inc. (NYSE:TER) beats Lam Research Corporation (NASDAQ:LRCX) on a total of 8 of the 14 factors compared between the two stocks. TER is growing fastly, has a higher cash conversion rate, higher liquidity and has lower financial risk. TER is more undervalued relative to its price target. Finally, TER has better sentiment signals based on short interest.