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ASML Holding N.V.'s (AMS:ASML) Intrinsic Value Is Potentially 23% Below Its Share Price

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, ASML Holding fair value estimate is €738

  • ASML Holding's €963 share price signals that it might be 31% overvalued

  • The €1,003 analyst price target for ASML is 36% more than our estimate of fair value

Does the June share price for ASML Holding N.V. (AMS:ASML) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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.

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View our latest analysis for ASML Holding

The Method

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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF (€, Millions)

€5.38b

€9.31b

€11.9b

€14.9b

€17.0b

€18.5b

€19.7b

€20.6b

€21.4b

€21.9b

Growth Rate Estimate Source

Analyst x14

Analyst x13

Analyst x9

Analyst x2

Analyst x2

Est @ 8.77%

Est @ 6.40%

Est @ 4.75%

Est @ 3.59%

Est @ 2.77%

Present Value (€, Millions) Discounted @ 7.0%

€5.0k

€8.1k

€9.8k

€11.4k

€12.1k

€12.3k

€12.3k

€12.0k

€11.6k

€11.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €106b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 (0.9%) 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 7.0%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = €22b× (1 + 0.9%) ÷ (7.0%– 0.9%) = €362b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €362b÷ ( 1 + 7.0%)10= €184b

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 €290b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €963, the company appears potentially overvalued at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
dcf

The Assumptions

Now 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 ASML Holding 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 7.0%, which is based on a levered beta of 1.329. 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 ASML Holding

Strength

  • Debt is not viewed as a risk.

Weakness

  • Earnings growth over the past year underperformed the Semiconductor industry.

  • Dividend is low compared to the top 25% of dividend payers in the Semiconductor market.

Opportunity

  • Annual earnings are forecast to grow faster than the Dutch market.

  • Good value based on P/E ratio compared to estimated Fair P/E ratio.

Threat

  • Revenue is forecast to grow slower than 20% per year.

Next Steps:

Although the valuation of a company is important, 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price exceeding the intrinsic value? For ASML Holding, we've put together three pertinent aspects you should explore:

  1. Risks: To that end, you should be aware of the 1 warning sign we've spotted with ASML Holding .

  2. Future Earnings: How does ASML'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.

  3. 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 ENXTAM 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.