Are Investors Undervaluing Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY) By 49%?

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Alnylam Pharmaceuticals fair value estimate is US$512
• Alnylam Pharmaceuticals is estimated to be 49% undervalued based on current share price of US$262
• Our fair value estimate is 81% higher than Alnylam Pharmaceuticals' analyst price target of US$283

In this article we are going to estimate the intrinsic value of Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY) by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Alnylam Pharmaceuticals

The Method

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. 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$68.1m	US$646.1m	US$1.13b	US$1.69b	US$2.13b	US$2.54b	US$2.89b	US$3.20b	US$3.46b	US$3.69b
Growth Rate Estimate Source	Analyst x6	Analyst x6	Analyst x5	Analyst x5	Est @ 26.15%	Est @ 19.06%	Est @ 14.09%	Est @ 10.61%	Est @ 8.18%	Est @ 6.48%
Present Value ($, Millions) Discounted @ 6.4%	US$64.0	US$570	US$939	US$1.3k	US$1.6k	US$1.7k	US$1.9k	US$1.9k	US$2.0k	US$2.0k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$14b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.5%) 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 6.4%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = US$3.7b× (1 + 2.5%) ÷ (6.4%– 2.5%) = US$96b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$96b÷ ( 1 + 6.4%)¹⁰= US$52b

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$66b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$262, the company appears quite good value at a 49% 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

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 Alnylam Pharmaceuticals 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 6.4%, which is based on a levered beta of 0.952. 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 Alnylam Pharmaceuticals

Looking Ahead:

Although the valuation of a company is important, it is only one of many factors that you need to assess 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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Alnylam Pharmaceuticals, we've compiled three fundamental items you should further research:

1. Risks: For example, we've discovered 4 warning signs for Alnylam Pharmaceuticals (1 shouldn't be ignored!) that you should be aware of before investing here.
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for ALNY's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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.