Is Augmedix, Inc. (NASDAQ:AUGX) Trading At A 40% Discount?

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Augmedix fair value estimate is US$1.92
• Current share price of US$1.16 suggests Augmedix is potentially 40% undervalued
• The US$3.33 analyst price target for AUGX is 73% more than our estimate of fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Augmedix, Inc. (NASDAQ:AUGX) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Augmedix

The Method

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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	-US$18.5m	-US$9.80m	US$2.50m	US$3.67m	US$4.90m	US$6.08m	US$7.15m	US$8.09m	US$8.88m	US$9.56m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ 46.80%	Est @ 33.48%	Est @ 24.15%	Est @ 17.62%	Est @ 13.05%	Est @ 9.85%	Est @ 7.61%
Present Value ($, Millions) Discounted @ 7.6%	-US$17.2	-US$8.5	US$2.0	US$2.7	US$3.4	US$3.9	US$4.3	US$4.5	US$4.6	US$4.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$4.3m

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 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 7.6%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$9.6m× (1 + 2.4%) ÷ (7.6%– 2.4%) = US$187m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$187m÷ ( 1 + 7.6%)¹⁰= US$89m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$94m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$1.2, the company appears quite good value at a 40% 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. 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 Augmedix 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 1.141. 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 Augmedix

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. The DCF model is not a perfect stock valuation tool. 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. What is the reason for the share price sitting below the intrinsic value? For Augmedix, we've put together three further factors you should further examine:

1. Risks: Take risks, for example - Augmedix has 5 warning signs (and 2 which are potentially serious) we think you should know about.
2. Future Earnings: How does AUGX'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 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.