Estimating The Intrinsic Value Of Trip.com Group Limited (NASDAQ:TCOM)

Key Insights

• The projected fair value for Trip.com Group is US$47.43 based on 2 Stage Free Cash Flow to Equity
• With US$40.52 share price, Trip.com Group appears to be trading close to its estimated fair value
• Analyst price target for TCOM is CN¥48.24, which is 1.7% above our fair value estimate

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Trip.com Group Limited (NASDAQ:TCOM) as an investment opportunity 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. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for Trip.com Group

The Model

We're using the 2-stage growth 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 a stable growth rate. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥10.7b	CN¥13.1b	CN¥14.0b	CN¥15.7b	CN¥16.9b	CN¥17.9b	CN¥18.8b	CN¥19.6b	CN¥20.3b	CN¥20.9b
Growth Rate Estimate Source	Analyst x10	Analyst x10	Analyst x2	Analyst x2	Est @ 7.85%	Est @ 6.14%	Est @ 4.95%	Est @ 4.11%	Est @ 3.52%	Est @ 3.11%
Present Value (CN¥, Millions) Discounted @ 9.4%	CN¥9.8k	CN¥10.9k	CN¥10.7k	CN¥10.9k	CN¥10.8k	CN¥10.5k	CN¥10.0k	CN¥9.6k	CN¥9.1k	CN¥8.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥101b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 9.4%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥21b× (1 + 2.2%) ÷ (9.4%– 2.2%) = CN¥296b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥296b÷ ( 1 + 9.4%)¹⁰= CN¥121b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥222b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$40.5, the company appears about fair value at a 15% 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

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Trip.com Group 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 9.4%, 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 Trip.com Group

Looking Ahead:

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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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 Trip.com Group, there are three important items you should consider:

1. Risks: As an example, we've found 1 warning sign for Trip.com Group that you need to consider before investing here.
2. Future Earnings: How does TCOM'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. Simply Wall St updates its DCF calculation for every American 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.