Credo Technology Group Holding's estimated fair value is US$23.36 based on 2 Stage Free Cash Flow to Equity
Current share price of US$24.90 suggests Credo Technology Group Holding is potentially trading close to its fair value
The US$35.08 analyst price target for CRDO is 50% more than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of Credo Technology Group Holding Ltd (NASDAQ:CRDO) by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
What's The Estimated Valuation?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$4.37m
US$112.5m
US$152.2m
US$182.8m
US$209.9m
US$233.2m
US$253.1m
US$270.2m
US$284.9m
US$297.9m
Growth Rate Estimate Source
Analyst x3
Analyst x3
Analyst x1
Est @ 20.10%
Est @ 14.82%
Est @ 11.12%
Est @ 8.54%
Est @ 6.73%
Est @ 5.46%
Est @ 4.57%
Present Value ($, Millions) Discounted @ 7.9%
US$4.0
US$96.6
US$121
US$135
US$144
US$148
US$149
US$147
US$144
US$139
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$1.2b
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 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 7.9%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$5.7b÷ ( 1 + 7.9%)10= US$2.7b
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$3.9b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$24.9, the company appears around fair value 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.
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Credo Technology Group Holding 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 7.9%, which is based on a levered beta of 1.308. 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 Credo Technology Group Holding
Strength
Currently debt free.
Balance sheet summary for CRDO.
Weakness
Expensive based on P/S ratio and estimated fair value.
Shareholders have been diluted in the past year.
What are analysts forecasting for CRDO?
Opportunity
Expected to breakeven next year.
Has sufficient cash runway for more than 3 years based on current free cash flows.
Threat
No apparent threats visible for CRDO.
Looking Ahead:
Although the valuation of a company is important, 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. 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. For Credo Technology Group Holding, there are three essential factors you should further examine:
Risks: We feel that you should assess the 2 warning signs for Credo Technology Group Holding we've flagged before making an investment in the company.
Future Earnings: How does CRDO'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.
主要見解
Credo Technology Group Holding的估值爲23.36美元,基於自由現金流量到股本的2階段
當前的股價爲24.90美元,表明Credo Technology Group Holding可能接近其公允價值
CRDO的分析師目標價爲35.08美元,比我們的公允價值估計高出50%
今天我們將通過估計Credo Technology Group Holding Ltd(NASDAQ: CRDO)的未來現金流量並以當前價值折現的方式來評估其內在價值。我們的分析將採用貼現現金流量(DCF)模型。儘管可能看起來相當複雜,但實際上並沒有那麼複雜。
上述計算非常依賴兩個假設。第一個是貼現率,另一個是現金流量。你不必同意這些輸入值,我建議你重新計算並修改這些數據。DCF模型也沒有考慮行業可能存在的週期性,或者公司未來的資本需求,因此無法全面描繪公司的潛在業績。鑑於我們將Credo Technology Group Holding視爲潛在股東,所以選擇股權成本作爲貼現率,而不是包括債務在內的資本成本(或加權平均資本成本,WACC)。在此計算中,我們使用了7.9%的貼現率,這是基於一個1.308的債務貝塔值。Beta是股票相對於整個市場的波動性的度量。我們根據全球可比公司的行業平均貝塔得到我們的貝塔值,且其限制在0.8至2.0之間,這是一個穩定業務的合理範圍。
Credo Technology Group Holding的SWOT分析
優勢
目前無債務。
CRDO的資產負債表摘要。
弱點
基於市銷率和估算公允價值,IFF有些昂貴。
股東在過去一年中被稀釋。
分析師對CRDO的預測是什麼?
機會
預計明年盈虧相抵。
根據當前自由現金流,財務運營資金足夠支撐三年以上。
威脅
CRDO沒有明顯的威脅可見。
展望未來:
儘管公司的估值很重要,但它不應該是您進行公司分析的唯一依據。DCF模型並非投資估值的全部。相反,DCF模型最好的用途是測試某些假設和理論,看看它們是否會導致公司被低估或高估。如果一個公司的增長率不同,或者其股權成本或無風險利率發生劇烈變化,輸出結果可能會有很大不同。對於Credo Technology Group Holding而言,有三個重要因素您應進一步審查:
風險:我們認爲在對該公司進行投資之前,應評估Credo Technology Group Holding的兩個警示信號。