A Look At The Intrinsic Value Of LiveChat Software S.A. (WSE:LVC)

Key Insights

• LiveChat Software's estimated fair value is zł110 based on 2 Stage Free Cash Flow to Equity
• Current share price of zł117 suggests LiveChat Software is trading close to its fair value
• Analyst price target for LVC is zł118 which is 7.6% above our fair value estimate

Today we will run through one way of estimating the intrinsic value of LiveChat Software S.A. (WSE:LVC) by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. 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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for LiveChat Software

The Method

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (PLN, Millions)	zł150.0m	zł159.6m	zł174.6m	zł192.9m	zł212.8m	zł228.0m	zł241.3m	zł253.1m	zł264.0m	zł274.1m
Growth Rate Estimate Source	Analyst x2	Analyst x3	Analyst x3	Analyst x3	Analyst x3	Est @ 7.15%	Est @ 5.84%	Est @ 4.92%	Est @ 4.28%	Est @ 3.83%
Present Value (PLN, Millions) Discounted @ 9.8%	zł137	zł132	zł132	zł133	zł133	zł130	zł125	zł120	zł114	zł107

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = zł1.3b

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 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 9.8%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = zł274m× (1 + 2.8%) ÷ (9.8%– 2.8%) = zł4.0b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= zł4.0b÷ ( 1 + 9.8%)¹⁰= zł1.6b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is zł2.8b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of zł117, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 LiveChat Software 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 9.8%, which is based on a levered beta of 0.980. 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 LiveChat Software

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For LiveChat Software, there are three additional items you should consider:

1. Risks: For example, we've discovered 2 warning signs for LiveChat Software (1 is a bit unpleasant!) that you should be aware of before investing here.
2. Future Earnings: How does LVC'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.
3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the WSE every day. If you want to find the calculation for other stocks just search here.

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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.