Guidewire Software, Inc. (NYSE:GWRE) shares are up more than 48.59% this year and recently decreased -2.15% or -$2.62 to settle at $119.21. Alaska Air Group, Inc. (NYSE:ALK), on the other hand, is up 11.93% year to date as of 12/02/2019. It currently trades at $68.11 and has returned -0.95% during the past week.
Guidewire Software, Inc. (NYSE:GWRE) and Alaska Air Group, Inc. (NYSE:ALK) are the two most active stocks in the Business Software & Services 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect GWRE to grow earnings at a 11.94% annual rate over the next 5 years. Comparatively, ALK is expected to grow at a 20.15% annual rate. All else equal, ALK’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. , compared to an EBITDA margin of 13.16% for Alaska Air Group, Inc. (ALK). GWRE’s ROI is 0.50% while ALK has a ROI of 8.50%. The interpretation is that ALK’s business generates a higher return on investment than GWRE’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. GWRE’s free cash flow (“FCF”) per share for the trailing twelve months was +1.03. Comparatively, ALK’s free cash flow per share was +0.89. On a percent-of-sales basis, GWRE’s free cash flow was 0.01% while ALK converted 1.33% of its revenues into cash flow. This means that, for a given level of sales, ALK is able to generate more free cash flow for investors.
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. GWRE has a current ratio of 5.70 compared to 0.70 for ALK. This means that GWRE can more easily cover its most immediate liabilities over the next twelve months. GWRE’s debt-to-equity ratio is 0.20 versus a D/E of 0.40 for ALK. ALK is therefore the more solvent of the two companies, and has lower financial risk.Valuation
GWRE trades at a forward P/E of 78.48, a P/B of 6.21, and a P/S of 13.62, compared to a forward P/E of 9.77, a P/B of 1.97, and a P/S of 0.98 for ALK. GWRE 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. GWRE is currently priced at a 4.18% to its one-year price target of 114.43. Comparatively, ALK is -12.42% relative to its price target of 77.77. This suggests that ALK 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. GWRE has a beta of 1.18 and ALK’s beta is 0.78. ALK’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. GWRE has a short ratio of 7.35 compared to a short interest of 9.40 for ALK. This implies that the market is currently less bearish on the outlook for GWRE.
Alaska Air Group, Inc. (NYSE:ALK) beats Guidewire Software, Inc. (NYSE:GWRE) on a total of 8 of the 14 factors compared between the two stocks. ALK is more profitable, generates a higher return on investment and has a higher cash conversion rate. In terms of valuation, ALK is the cheaper of the two stocks on an earnings, book value and sales basis, ALK is more undervalued relative to its price target.