Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Stride Gaming plc (AIM:STR) as an investment opportunity. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in December 2017 so be sure check the latest calculation for Stride Gaming here.
Crunching the numbers
I use what is known as the 2-stage model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To start off, I use the analyst consensus forecast of STR’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.3%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of £73.5M. Keen to understand how I calculated this value? Check out our detailed analysis here.
The graph above shows how STR’s earnings are expected to move in the future, which should give you an idea of STR’s outlook. Then, I determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is £279.8M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is £353.3M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of £4.90, which, compared to the current share price of £2.475, we see that Stride Gaming is quite undervalued at a 49.51% discount to what it is available for right now.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For STR, I’ve compiled three key aspects you should further research:
PS. Simply Wall St does a DCF calculation for every GB stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass 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.