Calculating The Fair Value Of ALT5 Sigma Corporation (NASDAQ:ALTS)

Simply Wall St

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, ALT5 Sigma fair value estimate is US$7.83
  • Current share price of US$8.13 suggests ALT5 Sigma is potentially trading close to its fair value
  • The average discount for ALT5 Sigma's competitorsis currently 47%

How far off is ALT5 Sigma Corporation (NASDAQ:ALTS) from its intrinsic value? Using the most recent financial data, we'll 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. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

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 start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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

2025202620272028202920302031203220332034
Levered FCF ($, Millions) US$1.35mUS$2.05mUS$2.82mUS$3.58mUS$4.29mUS$4.92mUS$5.47mUS$5.95mUS$6.36mUS$6.73m
Growth Rate Estimate SourceEst @ 73.20%Est @ 52.12%Est @ 37.37%Est @ 27.04%Est @ 19.81%Est @ 14.75%Est @ 11.21%Est @ 8.73%Est @ 6.99%Est @ 5.78%
Present Value ($, Millions) Discounted @ 6.4% US$1.3US$1.8US$2.3US$2.8US$3.1US$3.4US$3.5US$3.6US$3.6US$3.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$29m

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 (2.9%) 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$6.7m× (1 + 2.9%) ÷ (6.4%– 2.9%) = US$200m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$200m÷ ( 1 + 6.4%)10= US$108m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$137m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$8.1, the company appears around fair value at the time of writing. 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.

NasdaqCM:ALTS Discounted Cash Flow June 30th 2025

Important 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 ALT5 Sigma 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 0.800. 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.

See our latest analysis for ALT5 Sigma

SWOT Analysis for ALT5 Sigma

Strength
  • Net debt to equity ratio below 40%.
Weakness
  • Expensive based on P/S ratio and estimated fair value.
  • Shareholders have been diluted in the past year.
Opportunity
  • Has sufficient cash runway for more than 3 years based on current free cash flows.
Threat
  • Debt is not well covered by operating cash flow.

Next Steps:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For ALT5 Sigma, there are three essential items you should further research:

  1. Risks: As an example, we've found 2 warning signs for ALT5 Sigma (1 shouldn't be ignored!) that you need to consider before investing here.
  2. Future Earnings: How does ALTS'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. 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.

Valuation is complex, but we're here to simplify it.

Discover if ALT5 Sigma might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.