Using the 2 Stage Free Cash Flow to Equity, GlobalFoundries fair value estimate is US$66.39
GlobalFoundries is estimated to be 31% undervalued based on current share price of US$45.63
Analyst price target for GFS is US$55.29 which is 17% below our fair value estimate
Today we will run through one way of estimating the intrinsic value of GlobalFoundries Inc. (NASDAQ:GFS) by taking the forecast future cash flows of the company and discounting them back to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
The Method
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$1.65b
US$1.59b
US$2.00b
US$2.16b
US$2.29b
US$2.40b
US$2.50b
US$2.59b
US$2.68b
US$2.76b
Growth Rate Estimate Source
Analyst x9
Analyst x3
Analyst x1
Analyst x1
Est @ 5.88%
Est @ 4.87%
Est @ 4.16%
Est @ 3.66%
Est @ 3.31%
Est @ 3.07%
Present Value ($, Millions) Discounted @ 8.3%
US$1.5k
US$1.4k
US$1.6k
US$1.6k
US$1.5k
US$1.5k
US$1.4k
US$1.4k
US$1.3k
US$1.2k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$14b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.5%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.3%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$49b÷ ( 1 + 8.3%)10= US$22b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$37b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$45.6, the company appears quite undervalued at a 31% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
NasdaqGS:GFS Discounted Cash Flow August 17th 2024
Important Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at GlobalFoundries as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.3%, which is based on a levered beta of 1.398. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for GlobalFoundries
Strength
Debt is not viewed as a risk.
Balance sheet summary for GFS.
Weakness
Earnings declined over the past year.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Good value based on P/E ratio and estimated fair value.
Threat
Revenue is forecast to grow slower than 20% per year.
What else are analysts forecasting for GFS?
Moving On:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price sitting below the intrinsic value? For GlobalFoundries, we've compiled three important aspects you should consider:
Risks: Case in point, we've spotted 1 warning sign for GlobalFoundries you should be aware of.
Future Earnings: How does GFS's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
主要见解
采用2阶段自由现金流估值法,GlobalFoundries的公允价值估计为66.39美元。
以目前45.63美元的股价计算,GlobalFoundries被低估了31%。
分析师为GFS设定的目标股价为55.29美元,比我们的公允价值估计低17%。
今天我们将通过一种方法来估算GlobalFoundries Inc. (NASDAQ:GFS)的内在价值,即通过预测公司未来的现金流,将其折现至今天的价值。一种实现这一方法的方式是采用贴现现金流模型(DCF模型)。它可能听起来很复杂,但实际上它很简单!