Stock Analysis

Calculating The Fair Value Of Nodebis Applications AB (publ) (NGM:NODE)

Published
NGM:NODE

Key Insights

  • Nodebis Applications' estimated fair value is kr1.14 based on Dividend Discount Model
  • With kr1.17 share price, Nodebis Applications appears to be trading close to its estimated fair value
  • Nodebis Applications' peers seem to be trading at a higher premium to fair value based onthe industry average of -5.0%

In this article we are going to estimate the intrinsic value of Nodebis Applications AB (publ) (NGM:NODE) by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Nodebis Applications

Is Nodebis Applications Fairly Valued?

As Nodebis Applications operates in the it sector, we need to calculate the intrinsic value slightly differently. In this approach dividends per share (DPS) are used, as free cash flow is difficult to estimate and often not reported by analysts. This often underestimates the value of a stock, but it can still be good as a comparison to competitors. The 'Gordon Growth Model' is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.6%. We then discount this figure to today's value at a cost of equity of 7.6%. Compared to the current share price of kr1.2, 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.

Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)

= kr0.08 / (7.6% – 0.6%)

= kr1.1

NGM:NODE Discounted Cash Flow June 7th 2023

Important 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. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Nodebis Applications 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 7.6%, which is based on a levered beta of 1.178. 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 Nodebis Applications

Strength
  • Currently debt free.
  • Dividend is in the top 25% of dividend payers in the market.
Weakness
  • Current share price is above our estimate of fair value.
Opportunity
  • Has sufficient cash runway for more than 3 years based on current free cash flows.
  • Lack of analyst coverage makes it difficult to determine NODE's earnings prospects.
Threat
  • Paying a dividend but company is unprofitable.

Next Steps:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to 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 significantly impact the valuation. For Nodebis Applications, there are three relevant aspects you should further research:

  1. Risks: Be aware that Nodebis Applications is showing 4 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for NODE's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. 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 NGM every day. If you want to find the calculation for other stocks just search here.

Valuation is complex, but we're helping make it simple.

Find out whether Nodebis Applications is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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