Using the 2 Stage Free Cash Flow to Equity, Veeva Systems fair value estimate is US$274
Veeva Systems' US$217 share price signals that it might be 21% undervalued
Our fair value estimate is 17% higher than Veeva Systems' analyst price target of US$235
In this article we are going to estimate the intrinsic value of Veeva Systems Inc. (NYSE:VEEV) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Step By Step Through The Calculation
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$1.02b
US$1.19b
US$1.40b
US$1.58b
US$1.77b
US$1.91b
US$2.03b
US$2.13b
US$2.23b
US$2.31b
Growth Rate Estimate Source
Analyst x11
Analyst x11
Analyst x7
Analyst x2
Analyst x2
Est @ 7.89%
Est @ 6.27%
Est @ 5.14%
Est @ 4.35%
Est @ 3.79%
Present Value ($, Millions) Discounted @ 6.4%
US$961
US$1.1k
US$1.2k
US$1.2k
US$1.3k
US$1.3k
US$1.3k
US$1.3k
US$1.3k
US$1.2k
("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. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 6.4%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$60b÷ ( 1 + 6.4%)10= US$32b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$44b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$217, the company appears a touch undervalued at a 21% 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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Veeva Systems 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 6.4%, which is based on a levered beta of 0.957. 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 Veeva Systems
Strength
Currently debt free.
Balance sheet summary for VEEV.
Weakness
Earnings growth over the past year underperformed the Healthcare Services industry.
Shareholders have been diluted in the past year.
Opportunity
Annual revenue is forecast to grow faster than the American market.
Trading below our estimate of fair value by more than 20%.
Threat
Annual earnings are forecast to grow slower than the American market.
What else are analysts forecasting for VEEV?
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize 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 need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For Veeva Systems, there are three fundamental items you should look at:
Risks: We feel that you should assess the 1 warning sign for Veeva Systems we've flagged before making an investment in the company.
Future Earnings: How does VEEV'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. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock 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.
主要見解
利用兩階段自由現金流到股東權益, veeva systems 的公允價值估計爲274美元
veeva systems 的217美元股價表明它可能被低估了21%
我們的公允價值估計比 veeva systems 的分析師目標價235美元高17%
在本文中,我們將通過估算公司未來的現金流並將其貼現到現值來估算veeva systems inc. (紐交所: VEEV) 的內在價值。這將使用貼現現金流(DCF)模型來完成。在您覺得自己無法理解之前,請繼續閱讀!實際上比您想象的要簡單得多。