Comparing salesforce.com, inc. (CRM) and Frontier Communications Corporation (FTR)

salesforce.com, inc. (NYSE:CRM) shares are up more than 12.98% this year and recently increased 0.43% or $0.66 to settle at $154.75. Frontier Communications Corporation (NASDAQ:FTR), on the other hand, is down -51.68% year to date as of 09/12/2019. It currently trades at $1.15 and has returned 46.42% during the past week.

salesforce.com, inc. (NYSE:CRM) and Frontier Communications Corporation (NASDAQ:FTR) are the two most active stocks in the Application Software 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

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect CRM to grow earnings at a 18.55% annual rate over the next 5 years. Comparatively, FTR is expected to grow at a 7.30% annual rate. All else equal, CRM’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. salesforce.com, inc. (CRM) has an EBITDA margin of 12.56%. This suggests that CRM underlying business is more profitable CRM’s ROI is 3.70% while FTR has a ROI of 4.70%. The interpretation is that FTR’s business generates a higher return on investment than CRM’s.

Cash Flow

The value of a stock is simply the present value of its future free cash flows. CRM’s free cash flow (“FCF”) per share for the trailing twelve months was +0.55. Comparatively, FTR’s free cash flow per share was +2.88. On a percent-of-sales basis, CRM’s free cash flow was 3.63% while FTR converted 3.52% of its revenues into cash flow. This means that, for a given level of sales, CRM 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. CRM has a current ratio of 1.00 compared to 1.10 for FTR. This means that FTR can more easily cover its most immediate liabilities over the next twelve months.

Valuation

CRM trades at a forward P/E of 50.00, a P/B of 7.00, and a P/S of 9.38, compared to a P/S of 0.01 for FTR. CRM 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. CRM is currently priced at a -17.15% to its one-year price target of 186.79.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. CRM has a beta of 1.23 and FTR’s beta is 1.58. CRM’s shares are therefore the less volatile of the two stocks.

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. CRM has a short ratio of 2.50 compared to a short interest of 21.57 for FTR. This implies that the market is currently less bearish on the outlook for CRM.

Summary

Frontier Communications Corporation (NASDAQ:FTR) beats salesforce.com, inc. (NYSE:CRM) on a total of 7 of the 13 factors compared between the two stocks. FTR is growing fastly, has higher cash flow per share, higher liquidity and has lower financial risk. In terms of valuation, FTR is the cheaper of the two stocks on an earnings, book value and sales basis,