Today we’re doing a simple run of a valuation methodology that will estimate the attractiveness of DoorDash, Inc. (NYSE: DASH) as an investment opportunity by discounting the company’s projected future cash flows to today’s value. One way to achieve this is to use the DCF (Discounted Cash Flow) model. Before you think you can’t understand it, just keep reading! It’s actually a lot less complex than you can imagine.
We generally believe that a company’s value is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many and not without its flaws. If you still have burning questions about this type of assessment, take a look at the Simply Wall St analytical model.
Check out our latest analysis for DoorDash
We use what is called a 2-step model, which simply means that we have two different growth rates for the company’s cash flows. In general, the first stage is higher growth and the second stage is lower growth phase. First, we need to estimate the cash flows for the next ten years. We use analyst estimates whenever possible. However, if these are not available, we extrapolate the previous free cash flow (FCF) from the most recent estimate or reported value. We assume that companies with shrinking free cash flow will slow their rate of contraction and that companies with increasing free cash flow will slow their growth rate over this period. We do this to reflect that growth tends to slow down more in the first few years than in later years.
In general, we assume that a dollar today is more valuable than a dollar in the future. Therefore, the sum of these future cash flows is discounted to today’s value:
10-year free cash flow (FCF) estimate
|Leverage FCF ($, million)||$ 238.0 million||$ 335.2 million||$ 728.7 million||US $ 1.17b||$ 1.74 billion||US $ 2.19b||US $ 2.61b||US $ 2.96b||US $ 3.27b||US $ 3.52b|
|Source for growth rate estimation||Analyst x2||Analyst x5||Analyst x4||Analyst x3||Analyst x3||Est @ 25.98%||Est @ 18.8%||Est @ 13.77%||Est @ 10.25%||East at 7.79%|
|Present Value ($, Million) Discount @ 7.6%||US $ 221||US $ 290||US $ 585||$ 873||$ 1.2,000||$ 1.4,000||1.6 thousand US dollars||1.7 thousand US dollars||1.7 thousand US dollars||1.7 thousand US dollars|
(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = $ 11 billion
We now need to calculate the final value that takes into account all future cash flows after this ten year period. The Gordon growth formula is used to calculate the terminal value using 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 7.6%.
Terminal value (TV)= FCF2030 × (1 + g) ÷ (r – g) = $ 3.5 billion × (1 + 2.0%) ÷ (7.6% – 2.0%) = $ 65 billion
Present value of the terminal value (PVTV)= TV / (1 + r) 10 = $ 65 billion ÷ (1 + 7.6%) 10 = $ 31 billion
The total or equity value is then the sum of the present value of the future cash flows, which in this case is $ 43 billion. The final step is to divide the equity value by the number of shares issued. Compared to its current share price of $ 133, the company is near fair value at the time of writing. The assumptions in any calculation have a huge impact on the valuation, so it is better to think of this as a rough estimate that is not accurate to the last cent.
NYSE: DASH Discounted Cash Flow April 4, 2021
We would 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. You do not have to agree to these entries. I recommend repeating the calculations yourself and playing with them. The DCF also does not take into account the possible cyclical nature of an industry or the future capital requirements of a company, so it does not give a complete picture of a company’s potential performance. Given that we view DoorDash 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) responsible for debt. In this calculation we used 7.6% based on a leverage beta of 1.058. Beta is a measure of the volatility of a stock compared to the overall market. We get our beta from the industry-standard average beta of globally comparable companies with a set limit between 0.8 and 2.0, which is a reasonable range for a stable business.
While this is important, ideally, the DCF calculation isn’t the only analysis you will consider for a company. The DCF model is not a perfect tool for stock valuation. The best thing to do is to apply different cases and assumptions and see how they affect the company’s valuation. If a company is growing at a different rate, or if the cost of equity or the risk-free rate changes dramatically, performance can look very different. For DoorDash we have put together three relevant elements that you should consider:
- Risks: Every company has it and we discovered it 2 warning signs for DoorDash You should know it.
- administration: Did insiders raise their stocks to take advantage of market sentiment for DASH’s future prospects? Find out more about the CEO’s compensation and governance factors in our management and board analysis.
- Other solid companies: Low debt, high returns on equity, and good past performance are fundamental to a strong business. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you might not have considered!
PS. Simply Wall St updates its DCF calculation for every American share daily. So if you want to find out the intrinsic value of any other stock, just search here.
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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