Calculating The Intrinsic Value Of Giga-Byte Technology Co., Ltd. (TWSE:2376)

Key Insights

• Giga-Byte Technology's estimated fair value is NT$364 based on 2 Stage Free Cash Flow to Equity
• Giga-Byte Technology's NT$302 share price indicates it is trading at similar levels as its fair value estimate
• The NT$341 analyst price target for 2376 is 6.1% less than our estimate of fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Giga-Byte Technology Co., Ltd. (TWSE:2376) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

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.

Check out our latest analysis for Giga-Byte Technology

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.

Generally we assume that a dollar today is more valuable than a dollar in the future, 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 (NT$, Millions)	NT$1.68b	NT$10.1b	NT$12.1b	NT$13.7b	NT$15.0b	NT$16.0b	NT$16.9b	NT$17.5b	NT$18.0b	NT$18.4b
Growth Rate Estimate Source	Est @ 26.59%	Analyst x2	Est @ 18.86%	Est @ 13.45%	Est @ 9.66%	Est @ 7.01%	Est @ 5.15%	Est @ 3.85%	Est @ 2.94%	Est @ 2.31%
Present Value (NT$, Millions) Discounted @ 7.3%	NT$1.6k	NT$8.8k	NT$9.7k	NT$10.3k	NT$10.5k	NT$10.5k	NT$10.3k	NT$9.9k	NT$9.5k	NT$9.1k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = NT$90b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (0.8%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.3%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = NT$18b× (1 + 0.8%) ÷ (7.3%– 0.8%) = NT$286b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= NT$286b÷ ( 1 + 7.3%)¹⁰= NT$141b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is NT$231b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of NT$302, the company appears about fair value at a 17% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

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 Giga-Byte Technology 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 7.3%, which is based on a levered beta of 1.188. 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 Giga-Byte Technology

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Giga-Byte Technology, we've put together three fundamental aspects you should further examine:

1. Risks: Case in point, we've spotted 3 warning signs for Giga-Byte Technology you should be aware of.
2. Future Earnings: How does 2376'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 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. Simply Wall St updates its DCF calculation for every Taiwanese stock every day, so if you want to find the intrinsic value of any other stock 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.