Investors with an interest in Internet - Software stocks have likely encountered both Block (XYZ) and Spotify (SPOT). But which of these two companies is the best option for those looking for undervalued stocks? Let's take a closer look.
The best way to find great value stocks is to pair a strong Zacks Rank with an impressive grade in the Value category of our Style Scores system. The Zacks Rank is a proven strategy that targets companies with positive earnings estimate revision trends, while our Style Scores work to grade companies based on specific traits.
Currently, Block has a Zacks Rank of #2 (Buy), while Spotify has a Zacks Rank of #4 (Sell). This system places an emphasis on companies that have seen positive earnings estimate revisions, so investors should feel comfortable knowing that XYZ is likely seeing its earnings outlook improve to a greater extent. However, value investors will care about much more than just this.
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 Style Score Value grade factors in a variety of key fundamental metrics, including the popular P/E ratio, P/S ratio, earnings yield, cash flow per share, and a number of other key stats that are commonly used by value investors.
XYZ currently has a forward P/E ratio of 19.89, while SPOT has a forward P/E of 33.79. We also note that XYZ has a PEG ratio of 0.62. This figure is similar to the commonly-used P/E ratio, with the PEG ratio also factoring in a company's expected earnings growth rate. SPOT currently has a PEG ratio of 1.21.
Another notable valuation metric for XYZ is its P/B ratio of 2.13. The P/B ratio is used to compare a stock's market value with its book value, which is defined as total assets minus total liabilities. For comparison, SPOT has a P/B of 10.85.
Based on these metrics and many more, XYZ holds a Value grade of B, while SPOT has a Value grade of D.
XYZ is currently sporting an improving earnings outlook, which makes it stick out in our Zacks Rank model. And, based on the above valuation metrics, we feel that XYZ is likely the superior value option right now.
Beyond Nvidia: AI's Second Wave Is Here
The AI revolution has already minted millionaires. But the stocks everyone knows about aren't likely to keep delivering the biggest profits. AI’s second wave is moving from infrastructure to implementation and these companies are at the forefront of this transition, positioned to become what Amazon and Google were to the internet era.
See Stocks Now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Block, Inc. (XYZ): Free Stock Analysis Report
Spotify Technology (SPOT): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).