Are ClearPoint Neuro, Inc. (NASDAQ:CLPT) Investors Paying Above The Intrinsic Value?

Key Insights

• The projected fair value for ClearPoint Neuro is US$4.02 based on 2 Stage Free Cash Flow to Equity
• Current share price of US$5.39 suggests ClearPoint Neuro is potentially 34% overvalued
• Analyst price target for CLPT is US$10.00, which is 148% above our fair value estimate

In this article we are going to estimate the intrinsic value of ClearPoint Neuro, Inc. (NASDAQ:CLPT) by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.

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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for ClearPoint Neuro

Crunching The Numbers

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, 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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	-US$12.8m	-US$5.09m	US$2.10m	US$3.10m	US$4.15m	US$5.17m	US$6.09m	US$6.89m	US$7.57m	US$8.15m
Growth Rate Estimate Source	Analyst x1	Analyst x2	Analyst x1	Est @ 47.58%	Est @ 33.99%	Est @ 24.48%	Est @ 17.82%	Est @ 13.16%	Est @ 9.90%	Est @ 7.62%
Present Value ($, Millions) Discounted @ 6.7%	-US$12.0	-US$4.5	US$1.7	US$2.4	US$3.0	US$3.5	US$3.9	US$4.1	US$4.2	US$4.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$11m

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. 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 (2.3%) 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 6.7%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$8.2m× (1 + 2.3%) ÷ (6.7%– 2.3%) = US$188m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$188m÷ ( 1 + 6.7%)¹⁰= US$98m

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$109m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$5.4, the company appears reasonably expensive at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 ClearPoint Neuro 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 6.7%, which is based on a levered beta of 0.962. 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 ClearPoint Neuro

Looking Ahead:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. 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 lower than the current share price? For ClearPoint Neuro, we've put together three important elements you should explore:

1. Risks: Case in point, we've spotted 2 warning signs for ClearPoint Neuro you should be aware of.
2. Future Earnings: How does CLPT'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQCM every day. If you want to find the calculation for other stocks 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.