Gogo Inc. (NASDAQ:GOGO) shares are up more than 20.93% this year and recently decreased -3.14% or -$0.35 to settle at $10.80. Vonage Holdings Corp. (NYSE:VG), on the other hand, is up 46.72% year to date as of 12/05/2017. It currently trades at $9.95 and has returned 0.90% during the past week.
Gogo Inc. (NASDAQ:GOGO) and Vonage Holdings Corp. (NYSE:VG) are the two most active stocks in the Diversified Communication Services 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect GOGO to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, VG is expected to grow at a 10.00% annual rate. All else equal, All else equal, the two stocks’ identical expected growth rates would imply a similar 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., compared to an EBITDA margin of 8.12% for Vonage Holdings Corp. (VG). GOGO’s ROI is -5.70% while VG has a ROI of 4.10%. The interpretation is that VG’s business generates a higher return on investment than GOGO’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. GOGO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.86. Comparatively, VG’s free cash flow per share was +0.17. On a percent-of-sales basis, GOGO’s free cash flow was -0.01% while VG converted 0% of its revenues into cash flow. This means that, for a given level of sales, VG 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. GOGO has a current ratio of 2.20 compared to 0.60 for VG. This means that GOGO can more easily cover its most immediate liabilities over the next twelve months.
GOGO trades at a P/S of 1.40, compared to a forward P/E of 30.18, a P/B of 4.49, and a P/S of 2.29 for VG. GOGO 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. GOGO is currently priced at a -9.32% to its one-year price target of 11.91. Comparatively, VG is -6.92% relative to its price target of 10.69. This suggests that GOGO 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 GOGO and 1.60 for VG, which implies that analysts are more bullish on the outlook for GOGO.
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. GOGO has a beta of 1.64 and VG’s beta is -0.07. VG’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.GOGO has a short ratio of 22.16 compared to a short interest of 4.36 for VG. This implies that the market is currently less bearish on the outlook for VG.
Gogo Inc. (NASDAQ:GOGO) beats Vonage Holdings Corp. (NYSE:VG) on a total of 7 of the 14 factors compared between the two stocks. GOGO is more profitable, higher liquidity and has lower financial risk. In terms of valuation, GOGO is the cheaper of the two stocks on an earnings, book value and sales basis, GOGO is more undervalued relative to its price target. Finally, DVMT has better sentiment signals based on short interest.