Is Cardlytics, Inc. (NASDAQ:CDLX) Trading At A 38% Discount?

Key Insights

• Cardlytics' estimated fair value is US$7.88 based on 2 Stage Free Cash Flow to Equity
• Current share price of US$4.86 suggests Cardlytics is potentially 38% undervalued
• Our fair value estimate is 6.1% lower than Cardlytics' analyst price target of US$7.40

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Cardlytics, Inc. (NASDAQ:CDLX) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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.

View our latest analysis for Cardlytics

The Model

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF ($, Millions)	-US$17.7m	US$7.66m	US$11.8m	US$16.3m	US$20.7m	US$24.8m	US$28.4m	US$31.4m	US$34.0m	US$36.1m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ 53.61%	Est @ 38.15%	Est @ 27.32%	Est @ 19.75%	Est @ 14.44%	Est @ 10.73%	Est @ 8.13%	Est @ 6.31%
Present Value ($, Millions) Discounted @ 10%	-US$16.0	US$6.3	US$8.8	US$11.0	US$12.7	US$13.8	US$14.4	US$14.4	US$14.2	US$13.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$93m

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 (2.1%) 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 10%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = US$36m× (1 + 2.1%) ÷ (10%– 2.1%) = US$453m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$453m÷ ( 1 + 10%)¹⁰= US$171m

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$265m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$4.9, the company appears quite good value at a 38% discount to where the stock price trades currently. 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

We would point out that 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 Cardlytics 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 10%, which is based on a levered beta of 1.370. 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 Cardlytics

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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. Can we work out why the company is trading at a discount to intrinsic value? For Cardlytics, we've compiled three fundamental elements you should explore:

1. Risks: We feel that you should assess the 3 warning signs for Cardlytics (1 shouldn't be ignored!) we've flagged before making an investment in the company.
2. Future Earnings: How does CDLX'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 NASDAQGM 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.