Stock Analysis

An Intrinsic Calculation For AirSculpt Technologies, Inc. (NASDAQ:AIRS) Suggests It's 40% Undervalued

NasdaqGM:AIRS
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Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, AirSculpt Technologies fair value estimate is US$12.46
  • Current share price of US$7.51 suggests AirSculpt Technologies is potentially 40% undervalued
  • The US$6.75 analyst price target for AIRS is 46% less than our estimate of fair value

In this article we are going to estimate the intrinsic value of AirSculpt Technologies, Inc. (NASDAQ:AIRS) by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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 AirSculpt Technologies

The Model

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Levered FCF ($, Millions) US$18.3m US$20.7m US$22.6m US$24.1m US$25.5m US$26.7m US$27.8m US$28.8m US$29.8m US$30.7m
Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ 8.79% Est @ 6.94% Est @ 5.64% Est @ 4.74% Est @ 4.10% Est @ 3.66% Est @ 3.35% Est @ 3.13%
Present Value ($, Millions) Discounted @ 5.9% US$17.3 US$18.5 US$19.0 US$19.2 US$19.1 US$18.9 US$18.6 US$18.2 US$17.7 US$17.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$184m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 2.6%. We discount the terminal cash flows to today's value at a cost of equity of 5.9%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$31m× (1 + 2.6%) ÷ (5.9%– 2.6%) = US$956m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$956m÷ ( 1 + 5.9%)10= US$538m

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 US$721m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$7.5, the company appears quite good value at a 40% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
NasdaqGM:AIRS Discounted Cash Flow December 4th 2024

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 AirSculpt Technologies 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 5.9%, which is based on a levered beta of 0.800. 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 AirSculpt Technologies

Strength
  • No major strengths identified for AIRS.
Weakness
  • Interest payments on debt are not well covered.
Opportunity
  • Forecast to reduce losses next year.
  • Has sufficient cash runway for more than 3 years based on current free cash flows.
  • Trading below our estimate of fair value by more than 20%.
Threat
  • Debt is not well covered by operating cash flow.

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. 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. Why is the intrinsic value higher than the current share price? For AirSculpt Technologies, we've compiled three fundamental factors you should look at:

  1. Risks: We feel that you should assess the 2 warning signs for AirSculpt Technologies we've flagged before making an investment in the company.
  2. Future Earnings: How does AIRS'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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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.