Yahoo Finance Calculating The Fair Value Of Shutterfly Inc (NASDAQ:SFLY)
Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Shutterfly Inc (NASDAQ:SFLY) as an investment opportunity by taking the foreast future cash flows of the company and discounting them back to today’s value. This is done using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in September 2018 so be sure check out the updated calculation by following the link below.
Check out our latest analysis for Shutterfly
The method
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.
5-year cash flow estimate
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF ($, Millions) | $286.96 | $326.33 | $391.45 | $413.59 | $459.85 |
Source | Analyst x2 | Analyst x2 | Analyst x1 | Analyst x1 | Est @ 11.18% |
Present Value Discounted @ 16.78% | $245.73 | $239.29 | $245.81 | $222.40 | $211.75 |
Present Value of 5-year Cash Flow (PVCF)= US$1.16b
After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 16.8%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$459.8m × (1 + 2.9%) ÷ (16.8% – 2.9%) = US$3.42b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$3.42b ÷ ( 1 + 16.8%)5 = US$1.58b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$2.74b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $81.98. Compared to the current share price of $73.07, the stock is about right, perhaps slightly undervalued at a 10.9% discount to what it is available for right now.
Important assumptions
I’d like to 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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Shutterfly as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 16.8%, which is based on a levered beta of 1.961. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For SFLY, I’ve put together three essential aspects you should look at:
Financial Health: Does SFLY have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does SFLY’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of SFLY? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
