Commvault Systems, Inc. (NASDAQ:CVLT) shares are down more than -15.62% this year and recently increased 0.61% or $0.3 to settle at $49.86. Gartner, Inc. (NYSE:IT), on the other hand, is up 25.57% year to date as of 11/11/2019. It currently trades at $160.53 and has returned 1.65% during the past week.
Commvault Systems, Inc. (NASDAQ:CVLT) and Gartner, Inc. (NYSE:IT) are the two most active stocks in the Application Software 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 CVLT to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, IT is expected to grow at a 8.75% annual rate. All else equal, CVLT’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 14.37% for Gartner, Inc. (IT). CVLT’s ROI is -0.50% while IT has a ROI of 7.70%. The interpretation is that IT’s business generates a higher return on investment than CVLT’s.
Cash is king when it comes to investing. CVLT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.52. Comparatively, IT’s free cash flow per share was +2.02. On a percent-of-sales basis, CVLT’s free cash flow was 0% while IT converted 4.58% of its revenues into cash flow. This means that, for a given level of sales, IT 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. CVLT has a current ratio of 2.00 compared to 0.70 for IT. This means that CVLT can more easily cover its most immediate liabilities over the next twelve months. CVLT’s debt-to-equity ratio is 0.00 versus a D/E of 2.37 for IT. IT is therefore the more solvent of the two companies, and has lower financial risk.
CVLT trades at a forward P/E of 29.24, a P/B of 6.07, and a P/S of 3.29, compared to a forward P/E of 40.07, a P/B of 15.68, and a P/S of 3.47 for IT. CVLT is the cheaper 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. CVLT is currently priced at a -9.35% to its one-year price target of 55.00. Comparatively, IT is 0.49% relative to its price target of 159.75. This suggests that CVLT is the better investment over the next year.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. CVLT has a beta of 1.13 and IT’s beta is 1.23. CVLT’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. CVLT has a short ratio of 3.50 compared to a short interest of 6.09 for IT. This implies that the market is currently less bearish on the outlook for CVLT.
Commvault Systems, Inc. (NASDAQ:CVLT) beats Gartner, Inc. (NYSE:IT) on a total of 9 of the 14 factors compared between the two stocks. CVLT is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, CVLT is the cheaper of the two stocks on an earnings, book value and sales basis, CVLT is more undervalued relative to its price target. Finally, CVLT has better sentiment signals based on short interest.