Finance

Dissecting the Numbers for Netflix, Inc. (NFLX) and Texas Instruments Incorporated (TXN)

Netflix, Inc. (NASDAQ:NFLX) shares are up more than 69.42% this year and recently decreased -0.90% or -$2.97 to settle at $325.22. Texas Instruments Incorporated (NASDAQ:TXN), on the other hand, is up 5.64% year to date as of 05/17/2018. It currently trades at $110.33 and has returned 0.33% during the past week.

Netflix, Inc. (NASDAQ:NFLX) and Texas Instruments Incorporated (NASDAQ:TXN) are the two most active stocks in the CATV Systems 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.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect NFLX to grow earnings at a 63.27% annual rate over the next 5 years. Comparatively, TXN is expected to grow at a 12.77% annual rate. All else equal, NFLX’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 47.67% for Texas Instruments Incorporated (TXN). NFLX’s ROI is 9.80% while TXN has a ROI of 26.00%. The interpretation is that TXN’s business generates a higher return on investment than NFLX’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. NFLX’s free cash flow (“FCF”) per share for the trailing twelve months was -0.61. Comparatively, TXN’s free cash flow per share was +0.31. On a percent-of-sales basis, NFLX’s free cash flow was -2.27% while TXN converted 2.03% of its revenues into cash flow. This means that, for a given level of sales, TXN 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. NFLX has a current ratio of 1.30 compared to 4.60 for TXN. This means that TXN can more easily cover its most immediate liabilities over the next twelve months. NFLX’s debt-to-equity ratio is 1.63 versus a D/E of 0.38 for TXN. NFLX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NFLX trades at a forward P/E of 70.92, a P/B of 35.12, and a P/S of 11.21, compared to a forward P/E of 18.42, a P/B of 10.19, and a P/S of 7.07 for TXN. NFLX 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 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. NFLX is currently priced at a -2.37% to its one-year price target of 333.12. Comparatively, TXN is -8.59% relative to its price target of 120.70. This suggests that TXN is the better investment over the next year.

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. NFLX has a beta of 0.98 and TXN’s beta is 1.26. NFLX’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. NFLX has a short ratio of 1.77 compared to a short interest of 2.15 for TXN. This implies that the market is currently less bearish on the outlook for NFLX.

Summary

Texas Instruments Incorporated (NASDAQ:TXN) beats Netflix, Inc. (NASDAQ:NFLX) on a total of 10 of the 14 factors compared between the two stocks. TXN is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, TXN is the cheaper of the two stocks on an earnings, book value and sales basis, TXN is more undervalued relative to its price target. Finally, PCG has better sentiment signals based on short interest.

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