Finisar Corporation (NASDAQ:FNSR) shares are down more than -37.17% this year and recently increased 0.32% or $0.06 to settle at $19.02. Extreme Networks, Inc. (NASDAQ:EXTR), on the other hand, is up 129.82% year to date as of 11/13/2017. It currently trades at $11.56 and has returned -1.95% during the past week.
Finisar Corporation (NASDAQ:FNSR) and Extreme Networks, Inc. (NASDAQ:EXTR) are the two most active stocks in the Networking & Communication Devices industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect FNSR to grow earnings at a 13.50% annual rate over the next 5 years. Comparatively, EXTR is expected to grow at a 20.00% annual rate. All else equal, EXTR’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 5.17% for Extreme Networks, Inc. (EXTR). FNSR’s ROI is 11.60% while EXTR has a ROI of -2.50%. The interpretation is that FNSR’s business generates a higher return on investment than EXTR’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. FNSR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.05. Comparatively, EXTR’s free cash flow per share was +0.09. On a percent-of-sales basis, FNSR’s free cash flow was -0.39% while EXTR converted 0% of its revenues into cash flow. This means that, for a given level of sales, EXTR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. FNSR has a current ratio of 7.70 compared to 1.30 for EXTR. This means that FNSR can more easily cover its most immediate liabilities over the next twelve months. FNSR’s debt-to-equity ratio is 0.44 versus a D/E of 0.87 for EXTR. EXTR is therefore the more solvent of the two companies, and has lower financial risk.
FNSR trades at a forward P/E of 10.27, a P/B of 1.33, and a P/S of 1.44, compared to a forward P/E of 10.77, a P/B of 11.92, and a P/S of 1.93 for EXTR. FNSR is the cheaper 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
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. FNSR is currently priced at a -34.64% to its one-year price target of 29.10. Comparatively, EXTR is -27.52% relative to its price target of 15.95. This suggests that FNSR 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 1.90 for FNSR and 2.00 for EXTR, which implies that analysts are more bullish on the outlook for EXTR.
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. FNSR has a beta of 1.24 and EXTR’s beta is 1.13. EXTR’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. FNSR has a short ratio of 2.86 compared to a short interest of 1.50 for EXTR. This implies that the market is currently less bearish on the outlook for EXTR.
Finisar Corporation (NASDAQ:FNSR) beats Extreme Networks, Inc. (NASDAQ:EXTR) on a total of 9 of the 14 factors compared between the two stocks. FNSR is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, FNSR is the cheaper of the two stocks on an earnings, book value and sales basis, FNSR is more undervalued relative to its price target. Finally, JNPR has better sentiment signals based on short interest.