Global

Choosing Between ServiceNow, Inc. (NOW) and Tata Motors Limited (TTM)

ServiceNow, Inc. (NYSE:NOW) shares are up more than 32.02% this year and recently decreased -5.11% or -$9.27 to settle at $172.14. Tata Motors Limited (NYSE:TTM), on the other hand, is down -63.17% year to date as of 10/10/2018. It currently trades at $12.18 and has returned -20.81% during the past week.

ServiceNow, Inc. (NYSE:NOW) and Tata Motors Limited (NYSE:TTM) are the two most active stocks in the Information Technology Services industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect NOW to grow earnings at a 52.15% annual rate over the next 5 years. Comparatively, TTM is expected to grow at a 24.60% annual rate. All else equal, NOW’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. ServiceNow, Inc. (NOW) has an EBITDA margin of 14.45%. This suggests that NOW underlying business is more profitable

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. On a percent-of-sales basis, NOW’s free cash flow was 0% while TTM converted 0% of its revenues into cash flow. This means that, for a given level of sales, NOW is able to generate more free cash flow for investors.

Valuation

NOW trades at a forward P/E of 54.72, a P/B of 34.22, and a P/S of 13.58, compared to a P/B of 0.59, and a P/S of 0.93 for TTM. NOW 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. NOW is currently priced at a -17.68% to its one-year price target of 209.11. Comparatively, TTM is -55.71% relative to its price target of 27.50. This suggests that TTM is the better investment over the next year.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. NOW has a short ratio of 6.55 compared to a short interest of 4.33 for TTM. This implies that the market is currently less bearish on the outlook for TTM.

Summary

Tata Motors Limited (NYSE:TTM) beats ServiceNow, Inc. (NYSE:NOW) on a total of 7 of the 14 factors compared between the two stocks. TTM is growing fastly. In terms of valuation, TTM is the cheaper of the two stocks on an earnings, book value and sales basis, TTM is more undervalued relative to its price target. Finally, TTM has better sentiment signals based on short interest.

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