Calculation of the intrinsic value of MedAvail Holdings, Inc (NASDAQ: MDVL)
Does MedAvail Holdings, Inc (NASDAQ: MDVL) May Share Price Reflect What It Is Really Worth? Today we will estimate the intrinsic value of the security by taking expected future cash flows and discounting them to their present value. We will therefore take advantage of the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple!
Remember, however, that there are many ways to estimate the value of a business and that a DCF is just one method. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.
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Does MedAvail Holdings Have Fair Value?
We use what is called a 2-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth and the second stage is lower growth stage. To begin with, we need to get cash flow estimates for 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.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, 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) estimate
2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
Levered FCF ($, million) | -34.9 million USD | – US $ 23.3 million | -15.3 million USD | – US $ 3.82 million | $ 5.31 million | $ 8.37 million | 11.8 million USD | $ 15.3 million | 18.5 million USD | $ 21.3 million |
Source of estimated growth rate | Analyst x1 | Analyst x1 | Analyst x1 | Analyst x1 | Analyst x1 | Is 57.67% | Is 40.96% | Is 29.27% | East @ 21.09% | Is 15.36% |
Present value ($, millions) discounted at 5.8% | – $ 33.0 | -20.8 USD | -12.9 USD | -3.1 USD | 4.0 USD | $ 6.0 | $ 8.0 | US $ 9.7 | US $ 11.2 | $ 12.2 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = -18 million US dollars
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. The Gordon Growth formula is used to calculate the 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 their present value at a cost of equity of 5.8%.
Terminal value (TV)= FCF_{2030} × (1 + g) ÷ (r – g) = $ 21 million × (1 + 2.0%) ÷ (5.8% – 2.0%) = $ 575 million
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= $ 575 million ÷ (1 + 5.8%)^{ten}= 329 million USD
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total value of equity, which in this case is US $ 311 million. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current share price of US $ 11.7, the company appears to be around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.
The hypotheses
Now 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 MedAvail Holdings 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 into account debt. In this calculation, we used 5.8%, which is based on a leverage beta of 0.800. 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.
Next steps:
Valuation is only one side of the coin in terms of building your investment thesis, and ideally it won’t be the only analysis you look at for a business. DCF models are not the alpha and omega of investment valuation. 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. For MedAvail Holdings, we’ve put together three additional aspects that you should take a closer look at:
- Risks: For example, we discovered 3 warning signs for MedAvail Holdings (1 cannot be ignored!) Which you should be aware of before investing here.
- Future income: How does MDVL’s growth rate compare to its peers and to the market in general? 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 US 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 is not 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 does not have any position in the mentioned stocks.
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