Home Discount rate The intrinsic value of Seagate Technology Holdings plc (NASDAQ:STX) is potentially 38% higher than its stock price

The intrinsic value of Seagate Technology Holdings plc (NASDAQ:STX) is potentially 38% higher than its stock price

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In this article, we’ll estimate the intrinsic value of Seagate Technology Holdings plc (NASDAQ:STX) by estimating the company’s future cash flows and discounting them to their present value. One way to do this is to use the discounted cash flow (DCF) model. There really isn’t much to do, although it may seem quite complex.

Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. If you still have burning questions about this type of assessment, take a look at Simply Wall St.’s analysis template.

See our latest analysis for Seagate Technology Holdings

The model

We use what is called a 2-step model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. In the first step, we need to estimate the company’s cash flow over the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported 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 more in early years than in later 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 these future cash flows to their estimated value in today’s dollars:

Estimated free cash flow (FCF) over 10 years

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leveraged FCF ($, millions) $1.81 billion $1.87 billion $1.96 billion $1.91 billion $1.90 billion $1.90 billion $1.91 billion $1.94 billion $1.96 billion $1.99 billion
Growth rate estimate Source Analyst x6 Analyst x6 Analyst x4 Analyst x3 Analyst x2 Is 0.25% Is at 0.75% Is at 1.1% Is at 1.35% Is at 1.52%
Present value (millions of dollars) discounted at 8.5% $1.7,000 $1,600 $1.5k $1,400 $1,300 $1,200 $1,100 $1,000 $940 $880

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = $12 billion

The second stage is also known as the terminal value, it is the cash flow of the business after the first stage. For a number of reasons, a very conservative growth rate is used which 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 (1.9%) 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 8.5%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = $2.0 billion × (1 + 1.9%) ÷ (8.5%–1.9%) = $31 billion

Present value of terminal value (PVTV)= TV / (1 + r)ten= $31 billion ÷ (1 + 8.5%)ten= $14 billion

The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is $26 billion. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of $88.2, the company looks slightly undervalued at a 27% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in a different galaxy. Keep that in mind.

NasdaqGS: STX Discounted Cash Flow May 30, 2022

Important assumptions

The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play around with them. 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 Seagate Technology 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 factors in debt. In this calculation, we used 8.5%, which is based on a leveraged beta of 1.299. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Let’s move on :

Valuation is only one side of the coin in terms of building your investment thesis, and it’s just one of many factors you need to assess for a company. DCF models are not the be-all and end-all 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 company grows at a different pace, or if its cost of equity or risk-free rate changes sharply, output may be very different. Why is intrinsic value higher than the current stock price? For Seagate Technology Holdings, we’ve rounded up three fundamentals you should explore:

  1. Risks: Take risks, for example – Seagate Technology Holdings has 2 warning signs we think you should know.
  2. Future earnings: How does STX’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
  3. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of ​​what you might be missing!

PS. Simply Wall St updates its DCF calculation for every US stock daily, so if you want to find the intrinsic value of any other stock, do a search here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.