First Solar, Inc. (NASDAQ:FSLR) shares are up more than 90.28% this year and recently increased 1.46% or $0.88 to settle at $61.06. Alpha and Omega Semiconductor Limited (NASDAQ:AOSL), on the other hand, is down -16.13% year to date as of 11/20/2017. It currently trades at $17.84 and has returned 0.73% during the past week.
First Solar, Inc. (NASDAQ:FSLR) and Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) are the two most active stocks in the Semiconductor – Specialized 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, AOSL is expected to grow at a -2.00% annual rate. All else equal, FSLR’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 8.93% for Alpha and Omega Semiconductor Limited (AOSL). FSLR’s ROI is -10.40% while AOSL has a ROI of 3.50%. The interpretation is that AOSL’s business generates a higher return on investment than FSLR’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. FSLR’s free cash flow (“FCF”) per share for the trailing twelve months was +4.58. Comparatively, AOSL’s free cash flow per share was -. On a percent-of-sales basis, FSLR’s free cash flow was 16.21% while AOSL converted 0% of its revenues into cash flow. This means that, for a given level of sales, FSLR 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. FSLR has a current ratio of 6.90 compared to 2.90 for AOSL. This means that FSLR can more easily cover its most immediate liabilities over the next twelve months. FSLR’s debt-to-equity ratio is 0.06 versus a D/E of 0.01 for AOSL. FSLR is therefore the more solvent of the two companies, and has lower financial risk.
FSLR trades at a forward P/E of 52.77, a P/B of 1.16, and a P/S of 2.07, compared to a forward P/E of 15.51, a P/B of 1.57, and a P/S of 1.10 for AOSL. FSLR is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. FSLR is currently priced at a 5.99% to its one-year price target of 57.61. Comparatively, AOSL is -29.35% relative to its price target of 25.25. This suggests that AOSL 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 2.30 for FSLR and 2.00 for AOSL, which implies that analysts are more bullish on the outlook for FSLR.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. FSLR has a beta of 2.01 and AOSL’s beta is 0.28. AOSL’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. FSLR has a short ratio of 4.51 compared to a short interest of 1.42 for AOSL. This implies that the market is currently less bearish on the outlook for AOSL.
Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) beats First Solar, Inc. (NASDAQ:FSLR) on a total of 9 of the 14 factors compared between the two stocks. AOSL is growing fastly, generates a higher return on investment and has lower financial risk. In terms of valuation, AOSL is the cheaper of the two stocks on an earnings and sales basis, AOSL is more undervalued relative to its price target. Finally, AOSL has better sentiment signals based on short interest.