Fair value estimate of Nova Ltd. (NASDAQ: NVMI)
The October share price for Nova Ltd. (NASDAQ: NVMI) Reflect Its True Value? Today we’re going to estimate the intrinsic value of the stock by taking the company’s future cash flow forecast and discounting it to today’s value. To this end, we will take advantage of the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple!
We draw your attention to the fact that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. Anyone who wants to learn a little more about intrinsic value should read the Simply Wall St.
See our latest review for Nova
What is the estimated valuation?
We are going to use a two-step DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. To begin with, we need to get cash flow estimates for the next ten years. Since no free cash flow analyst estimate is available, we have extrapolated the previous free cash flow (FCF) from the last reported value of the company. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and therefore the sum of those future cash flows is then discounted to today’s value. :
10-year free cash flow (FCF) forecast
|Leverage FCF ($, Millions)||94.5 million US dollars||US $ 113.7 million||US $ 130.6 million||US $ 144.9 million||US $ 156.9 million||166.9 million US dollars||US $ 175.3 million||US $ 182.5 million||188.8 million US dollars||194.5 million US dollars|
|Source of estimated growth rate||East @ 28.22%||Est @ 20.34%||Est @ 14.83%||Est @ 10.97%||East @ 8.27%||Est @ 6.37%||East @ 5.05%||Est @ 4.12%||East @ 3.47%||East @ 3.02%|
|Present value (in millions of dollars) discounted at 7.7%||US $ 87.7||US $ 98.0||104 USD||108 USD||108 USD||107 USD||104 USD||101 USD||US $ 96.7||$ 92.5|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 1.0 billion
The second stage is also known as terminal value, this is the cash flow of the business after the first stage. The Gordon growth formula is used to calculate the 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 their present value at a cost of equity of 7.7%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 195 million × (1 + 2.0%) ÷ (7.7% to 2.0%) = US $ 3.4 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 3.4 billion ÷ (1 + 7.7%)ten= US $ 1.6 billion
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is $ 2.6 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current price of US $ 99.0, the company appears to be around fair value at the time of writing. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.
The above calculation is very dependent on two assumptions. One is the discount rate and the other is cash flow. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we view Nova 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 takes debt into account. In this calculation, we used 7.7%, which is based on a leveraged beta of 1.159. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta from globally comparable companies, with a limit imposed between 0.8 and 2.0, which is a reasonable range for a stable business.
While valuing a business is important, it’s just one of the many factors you need to assess for a business. The DCF model is not a perfect equity valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. For Nova, there are three important things to consider:
- Risks: To do this, you need to know the 1 warning sign we spotted with Nova.
- Future benefits: How does NVMI’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth expectations chart.
- Other strong companies: 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 trading fundamentals to see if there are other companies you might not have considered!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each NASDAQGS share. If you want to find the calculation for other actions, just search here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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