How far is Adyen NV (AMS: ADYEN) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock’s price is fair by taking expected future cash flows and discounting them to their present value. The DCF (Discounted Cash Flow) model is the tool we will apply to do this. Believe it or not, it’s not too hard to follow, as you will see in our example!
We generally believe that the value of a business is the present value of all the cash it will generate in the future. However, a DCF is only one evaluation measure among many, and it is not without its flaws. If you still have burning questions about this type of assessment, take a look at the Simply Wall St analysis model.
Check out our latest analysis for Adyen
We use the 2-step growth model, which simply means that we take into account two stages of business growth. During the initial period, the business can have a higher growth rate and the second stage is usually assumed to have a stable growth rate. First, we need to estimate the cash flow of the business over the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or the last published value. We assume that companies with decreasing free cash flow will slow their withdrawal rate, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect that growth tends to slow down more in the early years than in the later years.
Typically, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year Free Cash Flow (FCF) forecast
|Levered FCF (€, Millions)||€ 583.4 million||777.3 million euros||1.14 billion euros||€ 1.27bn||1.56 billion euros||€ 1.77bn||€ 1.93 billion||2.06 billion euros||€ 2.15 billion||2.22 billion euros|
|Source of estimated growth rate||Analyst x11||Analyst x11||Analyst x8||Analyst x3||Analyst x1||Is at 13.27%||Is 9.33%||Is 6.57%||Is 4.64%||Is at 3.29%|
|Present value (€, million) discounted at 5.2%||€ 555||€ 703||€ 977||€ 1.0K||1.2 K €||1.3 K €||1.4 K €||1.4 K €||1.4 K €||1.3 K €|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = € 11 billion
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. 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 used the 5-year average of the 10-year government bond yield (0.1%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 5.2%.
Terminal value (TV)= FCF2030 × (1 + g) ÷ (r – g) = € 2.2 billion × (1 + 0.1%) ÷ (5.2% – 0.1%) = € 44 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= € 44bn ÷ (1 + 5.2%)ten= € 27 billion
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is € 38bn. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of 1.7 K €, the company appears potentially overvalued at the time of writing. Remember though, this is only a rough estimate, and like any complex formula – garbage in, garbage out.
We draw your attention to the fact that the most important data for a discounted cash flow is the discount rate and, of course, the actual cash flow. You don’t have to agree with these entries, I recommend that you redo the math yourself and play around with it. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view Adyen 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 takes debt into account. In this calculation, we used 5.2%, which is based on a leveraged beta of 1.069. Beta is a measure of the volatility of a stock, relative 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.
While a business valuation is important, ideally, it won’t be the only analysis you look at for a business. The DCF model is not a perfect inventory valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. Can we understand why the company trades at a premium over its intrinsic value? For Adyen, we’ve compiled three additional aspects to consider:
- Risks: We think you should rate 2 warning signs for Adyen we reported before making an investment in the business.
- Future income: How does ADYEN’s growth rate compare to its peers and to the overall market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth forecast chart.
- Other strong companies: Low debt, high returns on equity, and good past performance are essential to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you may not have considered!
PS. Simply Wall St updates its DCF calculation for every Dutch stock every day, so if you want to find the intrinsic value of any other stock just search here.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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