PDF Solutions' estimated fair value is US$29.03 based on 2 Stage Free Cash Flow to Equity
Current share price of US$38.46 suggests PDF Solutions is potentially 33% overvalued
Analyst price target for PDFS is US$42.75, which is 47% above our fair value estimate
In this article we are going to estimate the intrinsic value of PDF Solutions, Inc. (NASDAQ:PDFS) by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
Step By Step Through The Calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$36.6m
US$46.3m
US$55.1m
US$62.9m
US$69.6m
US$75.3m
US$80.1m
US$84.3m
US$87.9m
US$91.3m
Growth Rate Estimate Source
Analyst x1
Est @ 26.38%
Est @ 19.18%
Est @ 14.14%
Est @ 10.61%
Est @ 8.14%
Est @ 6.41%
Est @ 5.20%
Est @ 4.36%
Est @ 3.76%
Present Value ($, Millions) Discounted @ 8.4%
US$33.8
US$39.3
US$43.2
US$45.5
US$46.4
US$46.3
US$45.5
US$44.1
US$42.4
US$40.6
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$427m
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 8.4%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$1.5b÷ ( 1 + 8.4%)10= US$687m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$1.1b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$38.5, the company appears potentially overvalued at the time of writing. 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:PDFS Discounted Cash Flow July 16th 2024
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 PDF Solutions 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 8.4%, which is based on a levered beta of 1.315. 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 PDF Solutions
Strength
Earnings growth over the past year exceeded the industry.
Currently debt free.
Balance sheet summary for PDFS.
Weakness
Expensive based on P/S ratio and estimated fair value.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Threat
Revenue is forecast to grow slower than 20% per year.
What else are analysts forecasting for PDFS?
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. 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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value lower than the current share price? For PDF Solutions, we've put together three fundamental factors you should consider:
Risks: Take risks, for example - PDF Solutions has 1 warning sign we think you should be aware of.
Future Earnings: How does PDFS'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
主要見解
PDF Solutions的估值爲29.03美元,基於2階段自由現金流回報率。
當前的38.46美元的股價表明PDF Solutions有可能被高估33%。
PDFS的分析師目標價爲42.75美元,比我們的公允價值估計高47%。
在本文中,我們將通過將預期未來現金流折現到現值來估算PDF Solutions, Inc. (納斯達克:PDFS)的內在價值。我們將利用折現現金流(DCF)模型來實現此目的。在你認爲你無法理解之前,請繼續閱讀!實際上它比你想象的要簡單得多。