Critical Comparison: Roku, Inc. (ROKU) vs. Brookdale Senior Living Inc. (BKD)

Roku, Inc. (NASDAQ:ROKU) shares are up more than 341.68% this year and recently increased 0.77% or $1.03 to settle at $135.33. Brookdale Senior Living Inc. (NYSE:BKD), on the other hand, is up 21.34% year to date as of 08/13/2019. It currently trades at $8.13 and has returned 4.36% during the past week.

Roku, Inc. (NASDAQ:ROKU) and Brookdale Senior Living Inc. (NYSE:BKD) are the two most active stocks in the CATV Systems 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.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect ROKU to grow earnings at a 20.00% annual rate over the next 5 years. Comparatively, BKD is expected to grow at a 10.00% annual rate. All else equal, ROKU’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. EBITDA margin of 8.79% for Brookdale Senior Living Inc. (BKD). ROKU’s ROI is -5.20% while BKD has a ROI of -9.90%. The interpretation is that ROKU’s business generates a higher return on investment than BKD’s.

Cash Flow

The value of a stock is simply the present value of its future free cash flows. ROKU’s free cash flow (“FCF”) per share for the trailing twelve months was +0.06. Comparatively, BKD’s free cash flow per share was +0.02. On a percent-of-sales basis, ROKU’s free cash flow was 0% while BKD converted 0.08% of its revenues into cash flow. This means that, for a given level of sales, BKD is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. ROKU has a current ratio of 2.80 compared to 0.70 for BKD. This means that ROKU can more easily cover its most immediate liabilities over the next twelve months. ROKU’s debt-to-equity ratio is 0.00 versus a D/E of 5.15 for BKD. BKD is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ROKU trades at a P/B of 41.51, and a P/S of 18.39, compared to a P/B of 1.76, and a P/S of 0.36 for BKD. 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. ROKU is currently priced at a 22.88% to its one-year price target of 110.13. Comparatively, BKD is -6.23% relative to its price target of 8.67. This suggests that BKD is the better investment over the next year.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. ROKU has a short ratio of 0.79 compared to a short interest of 5.89 for BKD. This implies that the market is currently less bearish on the outlook for ROKU.

Summary

Roku, Inc. (NASDAQ:ROKU) beats Brookdale Senior Living Inc. (NYSE:BKD) on a total of 8 of the 14 factors compared between the two stocks. ROKU is growing fastly, generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. Finally, ROKU has better sentiment signals based on short interest.