Using the 2 Stage Free Cash Flow to Equity, Zoom Video Communications fair value estimate is US$117
Zoom Video Communications is estimated to be 50% undervalued based on current share price of US$58.88
The US$76.49 analyst price target for ZM is 35% less than our estimate of fair value
In this article we are going to estimate the intrinsic value of Zoom Video Communications, Inc. (NASDAQ:ZM) by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
The Calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF ($, Millions)
US$1.37b
US$1.50b
US$1.62b
US$1.78b
US$1.83b
US$1.88b
US$1.92b
US$1.97b
US$2.02b
US$2.06b
Growth Rate Estimate Source
Analyst x19
Analyst x20
Analyst x19
Analyst x7
Analyst x3
Analyst x3
Est @ 2.41%
Est @ 2.40%
Est @ 2.40%
Est @ 2.39%
Present Value ($, Millions) Discounted @ 6.9%
US$1.3k
US$1.3k
US$1.3k
US$1.4k
US$1.3k
US$1.3k
US$1.2k
US$1.2k
US$1.1k
US$1.1k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$12b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 have used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.9%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$47b÷ ( 1 + 6.9%)10= US$24b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$36b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$58.9, the company appears quite undervalued at a 50% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
Important Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Zoom Video Communications 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 accounts for debt. In this calculation we've used 6.9%, which is based on a levered beta of 0.984. Beta is a measure of a stock's volatility, compared 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.
SWOT Analysis for Zoom Video Communications
Strength
Earnings growth over the past year exceeded the industry.
Currently debt free.
Balance sheet summary for ZM.
Weakness
Shareholders have been diluted in the past year.
Opportunity
Good value based on P/E ratio and estimated fair value.
Threat
Annual earnings are forecast to decline for the next 3 years.
What else are analysts forecasting for ZM?
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Zoom Video Communications, there are three further aspects you should look at:
Risks: Case in point, we've spotted 2 warning signs for Zoom Video Communications you should be aware of, and 1 of them shouldn't be ignored.
Future Earnings: How does ZM's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
關鍵見解
使用兩階段的股本自由現金流,Zoom Video Communications的公允價值估計爲117美元
根據目前58.88美元的股價,Zoom Video Communications的估值估計被低估了50%
分析師對ZM的目標股價爲76.49美元,比我們對公允價值的估計低35%
在本文中,我們將通過計算預期的未來現金流並將其折現爲今天的價值來估算Zoom Video Communications, Inc.(納斯達克股票代碼:ZM)的內在價值。我們的分析將採用貼現現金流(DCF)模型。儘管它可能看起來很複雜,但實際上並沒有那麼多。
我們要指出的是,貼現現金流的最重要投入是貼現率,當然還有實際的現金流。如果你不同意這些結果,那就自己計算一下,試一試假設。DCF也沒有考慮一個行業可能的週期性,也沒有考慮公司未來的資本需求,因此它沒有全面反映公司的潛在表現。鑑於我們將Zoom Video Communications視爲潛在股東,因此使用權益成本作爲貼現率,而不是構成債務的資本成本(或加權平均資本成本,WACC)。在此計算中,我們使用了6.9%,這是基於0.984的槓桿測試版。Beta是衡量股票與整個市場相比波動性的指標。我們的測試版來自全球可比公司的行業平均貝塔值,設定在0.8到2.0之間,這是一個穩定的業務的合理範圍。
Zoom 視頻通信的 SWOT 分析
力量
過去一年的收益增長超過了該行業。
目前無債務。
ZM 的資產負債表摘要。
弱點
在過去的一年中,股東被稀釋了。
機會
根據市盈率和估計的公允價值,物有所值。
威脅
預計未來三年的年收入將下降。
分析師對 ZM 還有什麼預測?
展望未來:
就建立投資論點而言,估值只是硬幣的一面,它不應該是你在研究公司時唯一考慮的指標。DCF模型不是完美的股票估值工具。取而代之的是,DCF模型的最佳用途是測試某些假設和理論,看看它們是否會導致公司被低估或高估。例如,如果稍微調整終值增長率,則可能會極大地改變整體結果。我們能否弄清楚爲什麼公司的交易價格低於內在價值?對於 Zoom Video Communications,您還應該考慮另外三個方面:
風險:舉個例子,我們發現了兩個你應該注意的Zoom Video Communications警告信號,其中一個不容忽視。