Advertisement
New Zealand markets closed
  • NZX 50

    12,134.97
    +76.68 (+0.64%)
     
  • NZD/USD

    0.6112
    +0.0015 (+0.24%)
     
  • NZD/EUR

    0.5610
    +0.0005 (+0.09%)
     
  • ALL ORDS

    8,206.10
    +72.70 (+0.89%)
     
  • ASX 200

    7,959.30
    +69.70 (+0.88%)
     
  • OIL

    83.31
    +0.69 (+0.84%)
     
  • GOLD

    2,406.20
    -15.70 (-0.65%)
     
  • NASDAQ

    20,211.36
    -464.02 (-2.24%)
     
  • FTSE

    8,246.28
    +22.94 (+0.28%)
     
  • Dow Jones

    39,753.75
    +32.39 (+0.08%)
     
  • DAX

    18,620.33
    +85.77 (+0.46%)
     
  • Hang Seng

    18,293.38
    +461.05 (+2.59%)
     
  • NIKKEI 225

    41,190.68
    -1,033.34 (-2.45%)
     
  • NZD/JPY

    97.2190
    +0.3740 (+0.39%)
     

Calculating The Fair Value Of iQIYI, Inc. (NASDAQ:IQ)

Does the January share price for iQIYI, Inc. (NASDAQ:IQ) 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. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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.

View our latest analysis for iQIYI

Is iQIYI Fairly Valued?

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 begin with, we have to get estimates of 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.

ADVERTISEMENT

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Levered FCF (CN¥, Millions)

CN¥5.29b

CN¥5.73b

CN¥2.13b

CN¥2.76b

CN¥3.23b

CN¥2.80b

CN¥2.55b

CN¥2.41b

CN¥2.33b

CN¥2.29b

Growth Rate Estimate Source

Analyst x2

Analyst x4

Analyst x1

Analyst x1

Analyst x1

Est @ -13.33%

Est @ -8.74%

Est @ -5.52%

Est @ -3.27%

Est @ -1.70%

Present Value (CN¥, Millions) Discounted @ 9.7%

CN¥4.8k

CN¥4.8k

CN¥1.6k

CN¥1.9k

CN¥2.0k

CN¥1.6k

CN¥1.3k

CN¥1.1k

CN¥1.0k

CN¥909

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥21b

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 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 9.7%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = CN¥2.3b× (1 + 2.0%) ÷ (9.7%– 2.0%) = CN¥30b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥30b÷ ( 1 + 9.7%)10= CN¥12b

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 CN¥33b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$6.2, the company appears around fair value 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

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 iQIYI 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 9.7%, which is based on a levered beta of 1.192. 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 iQIYI

Strength

  • Debt is well covered by earnings.

Weakness

  • Expensive based on P/S ratio and estimated fair value.

  • Shareholders have been diluted in the past year.

Opportunity

  • Expected to breakeven next year.

Threat

  • Debt is not well covered by operating cash flow.

  • Has less than 3 years of cash runway based on current free cash flow.

Moving On:

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. 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For iQIYI, there are three additional aspects you should explore:

  1. Risks: For example, we've discovered 2 warning signs for iQIYI (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

  2. Future Earnings: How does IQ'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 High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here