Today we’ll do a simple run through of a valuation method used to estimate the attractiveness of Berkeley Lights, Inc. ( NASDAQ:BLI ) as an investment opportunity by estimating the company’s future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Before you think you won’t be able to understand it, just read on! It’s actually much less complex than you’d imagine.
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 calculation
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 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.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value: 10-year free cash flow (FCF) estimate
Levered FCF ($, Millions) -US$46.2m -US$28.5m US$2.30m US$33.7m US$56.9m US$84.8m US$114.3m US$142.8m US$168.6m US$190.9m Growth Rate Estimate Source Analyst x2 Analyst x2 Analyst x1 Analyst x1 Est @ 68.99% Est @ 48.88% Est @ 34.8% Est @ 24.95% Est @ 18.05% Est @ 13.23% Present Value ($, Millions) Discounted @ 5.9% -US$43.7 -US$25.4 US$1.9 US$26.8 US$42.8 US$60.2 US$76.7 US$90.5 US$101 US$108 (“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$438m
The second stage is also known as Terminal Value, this is the business’s cash flow after 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 2.0%. We discount the terminal cash flows to today’s value at a cost of equity of 5.9%.
Terminal Value (TV) = FCF 2031 × (1 + g) ÷ (r – g) = US$191m× (1 + 2.0%) ÷ (5.9%– 2.0%) = US$5.0b
Present Value of Terminal Value (PVTV) = TV / (1 + r) 10 = US$5.0b÷ ( 1 + 5.9%) 10 = US$2.8b
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$3.3b. 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$24.4, the company appears quite good value at a 49% 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:BLI Discounted Cash Flow November 7th 2021 Important assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Berkeley Lights 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 5.9%, which is based on a levered beta of 0.893. Beta is a measure of a stock’s volatility, compared to the market as […]
source Are Investors Undervaluing Berkeley Lights, Inc. (NASDAQ:BLI) By 49%?