Is Sogou Inc (NYSE:SOGO) Worth $9.28 Based On Its Intrinsic Value?

Simply Wall St February 21, 2018

How far off is Sogou Inc (NYSE:SOGO) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. I will be using the discounted cash flows (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not February 2018 then I highly recommend you check out the latest calculation for Sogou by following the link below. View our latest analysis for Sogou

Crunching the numbers

I'm 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 perpetual stable growth rate. In the first stage we need to estimate the cash flows to the business over the next five years. Where possible I use analyst estimates, but when these aren't available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. The sum of these cash flows is then discounted to today's value.

5-year cash flow estimate

	2018	2019	2020	2021	2022
Levered FCF ($, Millions)	$75.00	$111.00	$230.00	$269.10	$312.16
Source	Analyst x1	Analyst x1	Analyst x1	Extrapolated @ (17%, capped from 21.82%)	Extrapolated @ (16%, capped from 21.82%)
Present Value Discounted @ 11.48%	$67.28	$89.32	$166.02	$174.25	$181.32

Present Value of 5-year Cash Flow (PVCF)= $678

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.5%. We discount this to today's value at a cost of equity of 11.5%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = $312 × (1 + 2.5%) ÷ (11.5% – 2.5%) = $3,551

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = $3,551 / ( 1 + 11.5%)⁵ = $2,063

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $2,741. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $6.28, which, compared to the current share price of $9.28, we see that Sogou is rather overvalued and not available at a discount at this time.

NYSE:SOGO Intrinsic Value Feb 21st 18

The assumptions

I'd like to point out that 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Sogou as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I've used 11.5%, which is based on a levered beta of 1.196. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For SOGO, I've put together three fundamental aspects you should look at:

1. Financial Health: Does SOGO have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does SOGO'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.
2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of SOGO? 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 does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.