Advertisement
New Zealand markets open in 6 hours 20 minutes
  • NZX 50

    11,699.79
    -28.27 (-0.24%)
     
  • NZD/USD

    0.6136
    +0.0015 (+0.24%)
     
  • ALL ORDS

    8,082.30
    -67.80 (-0.83%)
     
  • OIL

    80.00
    +0.77 (+0.97%)
     
  • GOLD

    2,419.80
    +34.30 (+1.44%)
     

A Look At The Intrinsic Value Of CLPS Incorporation (NASDAQ:CLPS)

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, CLPS Incorporation fair value estimate is US$1.22

  • With US$1.08 share price, CLPS Incorporation appears to be trading close to its estimated fair value

In this article we are going to estimate the intrinsic value of CLPS Incorporation (NASDAQ:CLPS) by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

ADVERTISEMENT

View our latest analysis for CLPS Incorporation

Crunching The Numbers

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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$2.26m

US$2.39m

US$2.51m

US$2.61m

US$2.70m

US$2.79m

US$2.87m

US$2.95m

US$3.02m

US$3.10m

Growth Rate Estimate Source

Est @ 7.43%

Est @ 5.89%

Est @ 4.81%

Est @ 4.05%

Est @ 3.52%

Est @ 3.15%

Est @ 2.89%

Est @ 2.71%

Est @ 2.59%

Est @ 2.50%

Present Value ($, Millions) Discounted @ 10%

US$2.1

US$2.0

US$1.9

US$1.8

US$1.7

US$1.6

US$1.4

US$1.3

US$1.3

US$1.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$16m

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. 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 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 10%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$3.1m× (1 + 2.3%) ÷ (10%– 2.3%) = US$40m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$40m÷ ( 1 + 10%)10= US$15m

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$31m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$1.1, the company appears about fair value at a 11% 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.

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 CLPS Incorporation 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 10%, which is based on a levered beta of 1.453. 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 CLPS Incorporation

Strength

  • Debt is not viewed as a risk.

Weakness

  • Shareholders have been diluted in the past year.

Opportunity

  • Has sufficient cash runway for more than 3 years based on current free cash flows.

  • Current share price is below our estimate of fair value.

  • Lack of analyst coverage makes it difficult to determine CLPS' earnings prospects.

Threat

  • No apparent threats visible for CLPS.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. For CLPS Incorporation, there are three essential items you should look at:

  1. Risks: We feel that you should assess the 2 warning signs for CLPS Incorporation we've flagged before making an investment in the company.

  2. 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!

  3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGM 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.