FormFactor, Inc. intrinsic value estimate (NASDAQ: FORM)
In this article, we’ll estimate the intrinsic value of FormFactor, Inc. (NASDAQ: FORM) by taking expected future cash flows and discounting them to their present value. One way to do this is to use the Discounted Cash Flow (DCF) model. Before you think you won’t be able to figure it out, read on! It’s actually a lot less complex than you might imagine.
Remember, however, that there are many ways to estimate the value of a business, and a DCF is just one method. If you still have burning questions about this type of valuation, take a look at the Simply Wall St.
Check out our latest analysis for FormFactor
Crunch the numbers
We use the 2step 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. To begin with, we need to estimate the next ten years of cash flow. Since no free cash flow analyst estimate is available, we have extrapolated the previous free cash flow (FCF) from the last reported value of the company. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent 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:
10year free cash flow (FCF) forecast
2021 
2022 
2023 
2024 
2025 
2026 
2027 
2028 
2029 
2030 

Leverage FCF ($, Millions) 
US $ 134.2 million 
US $ 144.6 million 
US $ 153.4 million 
US $ 160.8 million 
US $ 167.2 million 
$ 172.8 million 
US $ 177.9 million 
US $ 182.7 million 
US $ 187.2 million 
US $ 191.5 million 
Source of growth rate estimate 
East @ 10.27% 
Est @ 7.78% 
Est @ 6.05% 
Est @ 4.83% 
East @ 3.98% 
East @ 3.38% 
Est @ 2.96% 
East @ 2.67% 
East @ 2.47% 
East @ 2.32% 
Present value (in millions of dollars) discounted at 7.3% 
125 USD 
$ 126 
$ 124 
US $ 121 
117 USD 
113 USD 
108 USD 
104 USD 
$ 99.1 
US $ 94.5 
(“East” = FCF growth rate estimated by Simply Wall St)
10year present value of cash flows (PVCF) = US $ 1.1 billion
The second stage is also known as terminal value, this is the cash flow of the business after the first stage. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5year average of the 10year government bond yield of 2.0%. We discount the terminal cash flows to their present value at a cost of equity of 7.3%.
Terminal value (TV)= FCF_{2030} × (1 + g) ÷ (r – g) = US $ 192 million × (1 + 2.0%) ÷ (7.3% – 2.0%) = US $ 3.7 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= US $ 3.7 billion ÷ (1 + 7.3%)^{ten}= US $ 1.8 billion
The total value is the sum of the cash flows for the next ten years plus the final present value, which gives the total value of equity, which in this case is US $ 2.9 billion. The last step is then to divide the equity value by the number of shares outstanding. From the current share price of US $ 35.1, the company appears to be roughly at fair value at a 7.4% discount from the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
We emphasize that 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 assessment of a company’s future performance, so try the math yourself and check your own assumptions. 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 FormFactor 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 7.3%, which is based on a leveraged beta of 1.130. 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 from globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Looking forward:
While a business valuation is important, ideally it won’t be the only piece of analysis you will look at for a business. The DCF model is not a perfect equity valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, changes in the company’s cost of equity or the riskfree rate can have a significant impact on valuation. For FormFactor, we’ve put together three more things you should explore:

Risks: We think you should evaluate the 1 warning sign for FormFactor we reported before making an investment in the business.

Future benefits: How does FORM’s growth rate compare with that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.

Other high quality alternatives: Do you like a good allrounder? Explore our interactive list of highquality stocks to get a feel for what else you might be missing!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each NASDAQGS share. If you want to find the calculation for other actions, do a search here.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you longterm, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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