Dissecting the Numbers for Fortinet, Inc. (FTNT) and Zillow Group, Inc. (Z)

Fortinet, Inc. (NASDAQ:FTNT) shares are up more than 30.47% this year and recently increased 1.95% or $1.76 to settle at $91.89. Zillow Group, Inc. (NASDAQ:Z), on the other hand, is up 7.60% year to date as of 11/04/2019. It currently trades at $33.98 and has returned -2.83% during the past week.

Fortinet, Inc. (NASDAQ:FTNT) and Zillow Group, Inc. (NASDAQ:Z) are the two most active stocks in the Application Software 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

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 FTNT to grow earnings at a 18.43% annual rate over the next 5 years.

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. Fortinet, Inc. (FTNT) has an EBITDA margin of 19.73%. This suggests that FTNT underlying business is more profitable

Cash Flow

Earnings don’t always accurately reflect the amount of cash that a company brings in. FTNT’s free cash flow (“FCF”) per share for the trailing twelve months was +1.02. Comparatively, Z’s free cash flow per share was -1.18. On a percent-of-sales basis, FTNT’s free cash flow was 9.69% while Z converted -18.27% of its revenues into cash flow. This means that, for a given level of sales, FTNT is able to generate more free cash flow for investors.

Valuation

FTNT trades at a forward P/E of 35.14, a P/B of 13.11, and a P/S of 7.27, compared to a P/B of 2.14, and a P/S of 2.74 for Z. FTNT 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. FTNT is currently priced at a -2.78% to its one-year price target of 94.52. Comparatively, Z is -25.32% relative to its price target of 45.50. This suggests that Z 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. FTNT has a short ratio of 3.39 compared to a short interest of 8.66 for Z. This implies that the market is currently less bearish on the outlook for FTNT.

Summary

Fortinet, Inc. (NASDAQ:FTNT) beats Zillow Group, Inc. (NASDAQ:Z) on a total of 8 of the 14 factors compared between the two stocks. FTNT is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. Finally, FTNT has better sentiment signals based on short interest.