- United States
A Look At The Intrinsic Value Of Veracyte, Inc. (NASDAQ:VCYT)
- The projected fair value for Veracyte is US$20.37 based on 2 Stage Free Cash Flow to Equity
- Veracyte's US$22.43 share price indicates it is trading at similar levels as its fair value estimate
- Analyst price target for VCYT is US$31.67, which is 55% above our fair value estimate
Today we will run through one way of estimating the intrinsic value of Veracyte, Inc. (NASDAQ:VCYT) by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
See our latest analysis for Veracyte
Is Veracyte Fairly Valued?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
|Levered FCF ($, Millions)||US$25.6m||US$16.9m||US$34.2m||US$46.2m||US$57.8m||US$68.4m||US$77.5m||US$85.3m||US$91.8m||US$97.2m|
|Growth Rate Estimate Source||Analyst x1||Analyst x1||Analyst x1||Est @ 35.07%||Est @ 25.17%||Est @ 18.24%||Est @ 13.39%||Est @ 9.99%||Est @ 7.62%||Est @ 5.95%|
|Present Value ($, Millions) Discounted @ 6.8%||US$24.0||US$14.8||US$28.1||US$35.5||US$41.6||US$46.0||US$48.8||US$50.3||US$50.7||US$50.3|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$390m
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 6.8%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$97m× (1 + 2.1%) ÷ (6.8%– 2.1%) = US$2.1b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.1b÷ ( 1 + 6.8%)10= US$1.1b
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$1.5b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$22.4, the company appears around fair value 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.
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Veracyte 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 6.8%, 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.
SWOT Analysis for Veracyte
- Currently debt free.
- Expensive based on P/S ratio and estimated fair value.
- Forecast to reduce losses next year.
- Has sufficient cash runway for more than 3 years based on current free cash flows.
- Not expected to become profitable over the next 3 years.
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. 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. For Veracyte, we've compiled three additional aspects you should assess:
- Risks: To that end, you should be aware of the 1 warning sign we've spotted with Veracyte .
- Future Earnings: How does VCYT'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.
- 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.
Valuation is complex, but we're helping make it simple.
Find out whether Veracyte is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Veracyte, Inc. operates as a diagnostics company worldwide.
Excellent balance sheet and fair value.