. . World News – AU – Has this rating from Zendesk, Inc. . (NYSE: ZEN) Do Investors Imply Paying Too Much?

Corresponds to the December stock price for Zendesk, Inc. . (NYSE: ZEN) reflect on what is it really worth? Today we’re going to estimate the intrinsic value of the stock by discounting expected future cash flows to today’s value. One way to achieve this is to use the DCF (Discounted Cash Flow) model. Believe it or not, it’s not too difficult to follow as you will see from our example!

We point out that there are many ways to rate a company and, as with DCF, each technique has advantages and disadvantages in certain scenarios. If you still have burning questions about this type of assessment, take a look at the Simply Wall St analytical model.

We are going to use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first phase is generally a higher growth phase that flattens out towards the terminal value and is recorded in the second phase of « steady growth ». First, we need to get estimates of the next ten years of cash flow. We use analyst estimates whenever possible. However, if these are not available, we extrapolate the previous free cash flow (FCF) from the last 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. Hence, we discount the value of these future cash flows to their estimated value in today’s dollars:

(« Est » = Simply Wall St’s Estimated FCF Growth Rate) Present Value of 10 Year Cash Flow (PVCF) = $ 3. 9b

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. 2%. We discount the terminal cash flows to today’s value at a cost of equity of 8. 2%.

Terminal value (TV) = FCF2030 × (1 g) ÷ (r – g) = US $ 1. 1b × (1 2. 2%) ÷ (8. 2% – 2nd. 2%) = 18 billion. USD

Present value of terminal value (PVTV) = TV / (1 r) 10 = US $ 18b ÷ (1 8. 2%) 10 = 8 USD. 1b

The total value or equity value is then the sum of the present value of the future cash flows, which in this case is 12 billion. USD is. The final step is to divide the equity value by the number of shares issued. Compared to its current share price of $ 135, the company may appear overvalued at the time of writing. However, remember that this is only an approximate rating, and like any complex formula – garbage in, garbage out.

The most important inputs for a discounted cash flow are now the discount rate and of course the actual cash flows. If you do not agree with this result, try the calculation yourself and play with the assumptions. The DCF also does not take into account the possible cyclical nature of an industry or a company’s future capital requirements, so it does not give a complete picture of a company’s potential performance. Given that we view Zendesk as a potential shareholder, 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 8. 2% based on a leverage beta of 1. 002. 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 comparable companies worldwide with an imposed limit between 0. 8 and 2. 0, which is a reasonable range for a stable business.

While evaluating a company is important, ideally, it’s not the only analysis you will consider for a company. The DCF model is not a perfect tool for stock valuation. Instead, the best use for a DCF model is to test certain assumptions and theories to determine whether they would result in the company becoming undervalued or overvalued. For example, changes in the company’s cost of equity or the risk-free rate can significantly affect the valuation. What is the reason that the share price exceeds the intrinsic value? For Zendesk, we’ve put together three relevant factors that you should investigate further:

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 shares 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. * StockBrokers Interactive Brokers ranked as the lowest cost broker. com Annual Online Review 2020Do you have any feedback on this article? Concerned about the content? Contact us. Alternatively, send an email to the editorial team @ simplywallst. com.

Simply Wall St does a detailed calculation of the discounted cash flow for every stock in the market every 6 hours. So if you want to determine the intrinsic value of a company, just search here. It’s free.

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