Investors interested in stocks from the Internet - Software and Services sector have probably already heard of NetEase (NTES) and RingCentral (RNG). But which of these two stocks presents investors with the better value opportunity right now? Let's take a closer look.
There are plenty of strategies for discovering value stocks, but we have found that pairing a strong Zacks Rank with an impressive grade in the Value category of our Style Scores system produces the best returns. The Zacks Rank favors stocks with strong earnings estimate revision trends, and our Style Scores highlight companies with specific traits.
NetEase and RingCentral are sporting Zacks Ranks of #2 (Buy) and #3 (Hold), respectively, right now. This means that NTES's earnings estimate revision activity has been more impressive, so investors should feel comfortable with its improving analyst outlook. But this is just one piece of the puzzle for value investors.
Value investors also tend to look at a number of traditional, tried-and-true figures to help them find stocks that they believe are undervalued at their current share price levels.
The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that help us determine a company's fair value.
NTES currently has a forward P/E ratio of 20.24, while RNG has a forward P/E of 241.60. We also note that NTES has a PEG ratio of 0.47. This metric is used similarly to the famous P/E ratio, but the PEG ratio also takes into account the stock's expected earnings growth rate. RNG currently has a PEG ratio of 14.07.
Another notable valuation metric for NTES is its P/B ratio of 4.55. The P/B ratio pits a stock's market value against its book value, which is defined as total assets minus total liabilities. For comparison, RNG has a P/B of 25.42.
These metrics, and several others, help NTES earn a Value grade of B, while RNG has been given a Value grade of F.
NTES has seen stronger estimate revision activity and sports more attractive valuation metrics than RNG, so it seems like value investors will conclude that NTES is the superior option right now.