Is Vivint Smart Home, Inc. (NYSE: VVNT) trading at a 34% discount?
Today we’re going to review one way to estimate the intrinsic value of Vivint Smart Home, Inc. (NYSE: VVNT) by projecting its future cash flows, then discounting them to today’s value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don’t be put off by the lingo, the underlying calculations are actually pretty straightforward.
Keep in mind, however, that there are many ways to estimate the value of a business and that a DCF is just one method. Anyone who wants to learn a little more about intrinsic value should read the Simply Wall St.
Crunch the numbers
We are going to use a two-step DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. 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 latest estimate or stated value. 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 discount the value of those future cash flows to their estimated value in today’s dollars. hui:
10-year Free Cash Flow (FCF) estimate
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF ($, Millions) | 206.0 million US dollars | US $ 214.0 million | US $ 220.5 million | US $ 226.5 million | US $ 232.1 million | US $ 237.6 million | $ 242.8 million | US $ 248.0 million | US $ 253.2 million | US $ 258.4 million |
Source of estimated growth rate | Analyst x1 | Analyst x1 | Est @ 3.04% | East @ 2.72% | East @ 2.49% | East @ 2.33% | East @ 2.22% | Est @ 2.14% | East @ 2.09% | East @ 2.05% |
Present value (in millions of dollars) discounted at 7.4% | 192 USD | 186 USD | $ 178 | 170 USD | US $ 162 | 155 USD | $ 147 | 140 USD | US $ 133 | US $ 127 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 1.6 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. 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 7.4%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = US $ 258 million × (1 + 2.0%) ÷ (7.4% to 2.0%) = US $ 4.8 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= 4.8 billion US dollars ÷ (1 + 7.4%)^{ten}= US $ 2.4 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 $ 4.0 billion. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current share price of US $ 12.5, the company appears to be quite undervalued with a 34% discount from the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.
NYSE: VVNT Discounted Cash Flow November 17, 2021
The hypotheses
We draw your attention to the fact 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 full picture of a company’s potential performance. Since we view Vivint Smart Home 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 7.4%, which is based on a leveraged beta of 1.241. 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 comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
To move on :
While important, calculating DCF ideally won’t be the only piece of analysis you’ll look at for a business. DCF models are not the ultimate solution for investment valuation. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. Can we understand why the company trades at a discount to its intrinsic value? For Vivint Smart Home, there are three important factors to consider:
- Risks: Take risks, for example – Vivint Smart Home has 4 warning signs (and 1 which doesn’t suit us very well) we think you should be aware of.
- Future benefits: How does VVNT’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth expectations chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
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.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 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 documents. Simply Wall St has no position in any of the stocks mentioned.
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