Key Insights
- The projected fair value for Deezer is €2.61 based on 2 Stage Free Cash Flow to Equity
- With €2.76 share price, Deezer appears to be trading close to its estimated fair value
- Analyst price target for DEEZR is €2.80, which is 7.2% above our fair value estimate
In this article we are going to estimate the intrinsic value of Deezer S.A. (EPA:DEEZR) by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
View our latest analysis for Deezer
The Method
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. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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) | -€21.8m | €5.26m | €8.34m | €11.8m | €15.2m | €18.3m | €21.0m | €23.2m | €25.0m | €26.3m |
| Growth Rate Estimate Source | Analyst x3 | Analyst x3 | Est @ 58.56% | Est @ 41.22% | Est @ 29.07% | Est @ 20.57% | Est @ 14.62% | Est @ 10.46% | Est @ 7.54% | Est @ 5.50% |
| Present Value (€, Millions) Discounted @ 6.8% | -€20.4 | €4.6 | €6.8 | €9.1 | €10.9 | €12.4 | €13.3 | €13.7 | €13.8 | €13.7 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €78m
The second stage is also known as Terminal Value, this is the business's cash flow after 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 0.7%. We discount the terminal cash flows to today's value at a cost of equity of 6.8%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = €26m× (1 + 0.7%) ÷ (6.8%– 0.7%) = €439m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €439m÷ ( 1 + 6.8%)10= €228m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €306m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of €2.8, the company appears around fair value at the time of writing. 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.
The Assumptions
We would point out that 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 Deezer 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 6.8%, which is based on a levered beta of 1.051. 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 Deezer
- Debt is well covered by earnings.
- Expensive based on P/S ratio and estimated fair value.
- Shareholders have been diluted in the past year.
- Forecast to reduce losses next year.
- Debt is not well covered by operating cash flow.
- Has less than 3 years of cash runway based on current free cash flow.
- Total liabilities exceed total assets, which raises the risk of financial distress.
- Not expected to become profitable over the next 3 years.
Looking Ahead:
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Deezer, there are three important factors you should consider:
- Risks: To that end, you should learn about the 4 warning signs we've spotted with Deezer (including 1 which is significant) .
- Future Earnings: How does DEEZR's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- 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!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ENXTPA every day. If you want to find the calculation for other stocks just search here.
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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.
About ENXTPA:DEEZR
Undervalued very low.
