Home Discount rate Zeta Global Holdings Corp. (NYSE: ZETA) expensive for a reason? ...

Zeta Global Holdings Corp. (NYSE: ZETA) expensive for a reason? A look at its intrinsic value

4
0

The January price of Zeta Global Holdings Corp. (NYSE: ZETA) reflect its real value? Today, we’re going to estimate the intrinsic value of the stock by estimating the company’s future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Patterns like these may seem beyond a layman’s comprehension, but they are fairly easy to follow.

Remember, however, that there are many ways to estimate the value of a business and that a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should read the Simply Wall St.

Crunch the numbers

We use what is called a two-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. 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 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.

In general, we assume that a dollar today is worth more than a dollar in the future, so we discount the value of those future cash flows to their estimated value in today’s dollars:

10-year Free Cash Flow (FCF) estimate

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leverage FCF ($, Millions) US $ 26.6 million $ 54.7 million US $ 59.5 million US $ 63.5 million US $ 66.9 million US $ 69.7 million US $ 72.2 million US $ 74.5 million US $ 76.5 million US $ 78.5 million
Source of estimated growth rate Analyst x4 Analyst x4 Est @ 8.74% Est @ 6.71% East @ 5.28% East @ 4.29% Est @ 3.59% East @ 3.1% East @ 2.76% Is 2.52%
Present value (in millions of dollars) discounted at 6.5% US $ 24.9 US $ 48.2 US $ 49.2 $ 49.3 $ 48.7 US $ 47.7 US $ 46.4 US $ 44.9 $ 43.3 US $ 41.6

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 444 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. 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 (2.0%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 6.5%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 78 million × (1 + 2.0%) ÷ (6.5% – 2.0%) = US $ 1.7 billion

Present value of terminal value (PVTV)= TV / (1 + r)ten= 1.7 billion US dollars ÷ (1 + 6.5%)ten= US $ 927 million

Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is $ 1.4 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of US $ 8.6, the company appears slightly overvalued 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.

NYSE: ZETA Discounted Cash Flow January 4, 2022

Important assumptions

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 Zeta Global 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 6.5%, which is based on a leveraged beta of 1.046. 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.

Next steps:

While a business valuation is important, it shouldn’t be the only metric you look at when researching a business. It is not possible to achieve a rock-solid valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. Why is intrinsic value lower than the current share price? For Zeta Global Holdings, we’ve compiled three relevant things you should research further:

  1. Risks: Take risks, for example – Zeta Global Holdings has 2 warning signs we think you should be aware.
  2. Future benefits: How does ZETA’s growth rate compare to 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.
  3. 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.

Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.

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 any stock 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


Source link