Square, Inc. (NYSE:SQ) shares are up more than 123.39% this year and recently decreased -10.12% or -$8.72 to settle at $77.45. Sirius XM Holdings Inc. (NASDAQ:SIRI), on the other hand, is up 11.01% year to date as of 10/10/2018. It currently trades at $5.95 and has returned -4.95% during the past week.
Square, Inc. (NYSE:SQ) and Sirius XM Holdings Inc. (NASDAQ:SIRI) are the two most active stocks in the Internet Software & 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.Growth
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 SQ to grow earnings at a 54.80% annual rate over the next 5 years. Comparatively, SIRI is expected to grow at a 20.89% annual rate. All else equal, SQ’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 35.78% for Sirius XM Holdings Inc. (SIRI). SQ’s ROI is -4.80% while SIRI has a ROI of 22.30%. The interpretation is that SIRI’s business generates a higher return on investment than SQ’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. SQ’s free cash flow (“FCF”) per share for the trailing twelve months was +0.01. Comparatively, SIRI’s free cash flow per share was +0.10. On a percent-of-sales basis, SQ’s free cash flow was 0.19% while SIRI converted 8.26% of its revenues into cash flow. This means that, for a given level of sales, SIRI is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. SQ has a current ratio of 2.20 compared to 0.20 for SIRI. This means that SQ can more easily cover its most immediate liabilities over the next twelve months.Valuation
SQ trades at a forward P/E of 98.91, a P/B of 28.90, and a P/S of 11.89, compared to a forward P/E of 21.64, and a P/S of 4.84 for SIRI. SQ 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. SQ is currently priced at a -1.74% to its one-year price target of 78.82. Comparatively, SIRI is -14.76% relative to its price target of 6.98. This suggests that SIRI is the better investment over the next year.
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. SQ has a short ratio of 2.35 compared to a short interest of 10.60 for SIRI. This implies that the market is currently less bearish on the outlook for SQ.Summary
Sirius XM Holdings Inc. (NASDAQ:SIRI) beats Square, Inc. (NYSE:SQ) on a total of 9 of the 14 factors compared between the two stocks. SIRI is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, SIRI is the cheaper of the two stocks on an earnings, book value and sales basis, SIRI is more undervalued relative to its price target. Finally, MSFT has better sentiment signals based on short interest.