Comparing New Relic, Inc. (NEWR) and TransUnion (TRU)

New Relic, Inc. (NYSE:NEWR) shares are down more than -15.99% this year and recently decreased -0.58% or -$0.4 to settle at $68.02. TransUnion (NYSE:TRU), on the other hand, is up 51.95% year to date as of 11/29/2019. It currently trades at $86.31 and has returned 1.59% during the past week.

New Relic, Inc. (NYSE:NEWR) and TransUnion (NYSE:TRU) are the two most active stocks in the Business 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 increase earnings at a high compound rate over time are attractive to investors. Analysts expect NEWR to grow earnings at a 17.20% annual rate over the next 5 years. Comparatively, TRU is expected to grow at a 14.45% annual rate. All else equal, NEWR’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. , compared to an EBITDA margin of 35.23% for TransUnion (TRU). NEWR’s ROI is -4.50% while TRU has a ROI of 7.30%. The interpretation is that TRU’s business generates a higher return on investment than NEWR’s.

Cash Flow

If there’s one thing investors care more about than earnings, it’s cash flow. NEWR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.14. Comparatively, TRU’s free cash flow per share was +1.15. On a percent-of-sales basis, NEWR’s free cash flow was 0% while TRU converted 9.35% of its revenues into cash flow. This means that, for a given level of sales, TRU 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. NEWR has a current ratio of 3.00 compared to 1.40 for TRU. This means that NEWR can more easily cover its most immediate liabilities over the next twelve months. NEWR’s debt-to-equity ratio is 1.12 versus a D/E of 1.84 for TRU. TRU is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NEWR trades at a forward P/E of 85.88, a P/B of 10.69, and a P/S of 7.41, compared to a forward P/E of 27.67, a P/B of 7.97, and a P/S of 6.34 for TRU. NEWR 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

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. NEWR is currently priced at a -8.61% to its one-year price target of 74.43. Comparatively, TRU is -2.58% relative to its price target of 88.60. This suggests that NEWR is the better investment over the next year.

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. NEWR has a beta of 0.98 and TRU’s beta is 0.98. TRU’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. NEWR has a short ratio of 3.61 compared to a short interest of 2.81 for TRU. This implies that the market is currently less bearish on the outlook for TRU.

Summary

TransUnion (NYSE:TRU) beats New Relic, Inc. (NYSE:NEWR) on a total of 9 of the 14 factors compared between the two stocks. TRU is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, TRU is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, TRU has better sentiment signals based on short interest.