Microchip Technology Incorporated (NASDAQ:MCHP) shares are up more than 32.74% this year and recently increased 0.05% or $0.05 to settle at $95.47. Guardant Health, Inc. (NASDAQ:GH), on the other hand, is up 104.97% year to date as of 09/12/2019. It currently trades at $77.05 and has returned -6.79% during the past week.
Microchip Technology Incorporated (NASDAQ:MCHP) and Guardant Health, Inc. (NASDAQ:GH) are the two most active stocks in the Semiconductor – Broad Line industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
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 MCHP to grow earnings at a 5.40% annual rate over the next 5 years. Comparatively, GH is expected to grow at a 34.60% annual rate. All else equal, GH’s higher growth rate would imply a greater potential for capital appreciation.
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. Microchip Technology Incorporated (MCHP) has an EBITDA margin of 31.24%. This suggests that MCHP underlying business is more profitable MCHP’s ROI is 5.60% while GH has a ROI of -18.40%. The interpretation is that MCHP’s business generates a higher return on investment than GH’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. MCHP’s free cash flow (“FCF”) per share for the trailing twelve months was +1.06. Comparatively, GH’s free cash flow per share was -0.19. On a percent-of-sales basis, MCHP’s free cash flow was 4.72% while GH converted -0.02% of its revenues into cash flow. This means that, for a given level of sales, MCHP is able to generate more free cash flow for investors.
Balance sheet risk is one of the biggest factors to consider before investing. MCHP has a current ratio of 0.90 compared to 10.60 for GH. This means that GH can more easily cover its most immediate liabilities over the next twelve months. MCHP’s debt-to-equity ratio is 1.91 versus a D/E of 0.00 for GH. MCHP is therefore the more solvent of the two companies, and has lower financial risk.Valuation
MCHP trades at a forward P/E of 13.73, a P/B of 4.29, and a P/S of 4.08, compared to a P/B of 8.41, and a P/S of 50.00 for GH. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. MCHP is currently priced at a -8.61% to its one-year price target of 104.47. Comparatively, GH is -36.74% relative to its price target of 121.80. This suggests that GH 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. MCHP has a short ratio of 14.46 compared to a short interest of 2.61 for GH. This implies that the market is currently less bearish on the outlook for GH.
Guardant Health, Inc. (NASDAQ:GH) beats Microchip Technology Incorporated (NASDAQ:MCHP) on a total of 8 of the 14 factors compared between the two stocks. GH is more profitable, higher liquidity and has lower financial risk. GH is more undervalued relative to its price target. Finally, GH has better sentiment signals based on short interest.