Stock Analysis

Calculating The Intrinsic Value Of Rent the Runway, Inc. (NASDAQ:RENT)

January 31, 2024

Key Insights

Using the 2 Stage Free Cash Flow to Equity, Rent the Runway fair value estimate is US$0.70
Current share price of US$0.64 suggests Rent the Runway is potentially trading close to its fair value
Analyst price target for RENT is US$1.48, which is 111% above our fair value estimate

Does the January share price for Rent the Runway, Inc. (NASDAQ:RENT) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present 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.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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.

Check out our latest analysis for Rent the Runway

The Method

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	-US$52.4m	US$3.20m	US$5.02m	US$7.06m	US$9.10m	US$11.0m	US$12.7m	US$14.2m	US$15.4m	US$16.4m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ 56.93%	Est @ 40.52%	Est @ 29.03%	Est @ 20.98%	Est @ 15.36%	Est @ 11.41%	Est @ 8.66%	Est @ 6.73%
Present Value ($, Millions) Discounted @ 12%	-US$46.7	US$2.5	US$3.6	US$4.4	US$5.1	US$5.5	US$5.7	US$5.6	US$5.4	US$5.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = -US$3.6m

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 (2.2%) 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 12%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$16m× (1 + 2.2%) ÷ (12%– 2.2%) = US$168m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$168m÷ ( 1 + 12%)¹⁰= US$53m

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$49m. 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$0.6, the company appears about fair value at a 8.4% 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.

dcf — NasdaqCM:RENT Discounted Cash Flow January 31st 2024

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. 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 Rent the Runway 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 12%, which is based on a levered beta of 2.000. 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 Rent the Runway

Strength

Debt is well covered by earnings.

Balance sheet summary for RENT.

Weakness

Shareholders have been diluted in the past year.

Opportunity

Forecast to reduce losses next year.

Good value based on P/S ratio and estimated fair value.

Significant insider buying over the past 3 months.

Threat

Debt is not well covered by operating cash flow.

Has less than 3 years of cash runway based on current free cash flow.

Total liabilities exceed total assets, which raises the risk of financial distress.

Not expected to become profitable over the next 3 years.

Is RENT well equipped to handle threats?

Moving On:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Rent the Runway, there are three further items you should assess:

Risks: For example, we've discovered 5 warning signs for Rent the Runway (2 are a bit unpleasant!) that you should be aware of before investing here.
Future Earnings: How does RENT'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. 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.

Valuation is complex, but we're helping make it simple.

Find out whether Rent the Runway 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.

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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.