An Intrinsic Calculation For ThredUp Inc. (NASDAQ:TDUP) Suggests It's 22% Undervalued

Key Insights

• ThredUp's estimated fair value is US$2.23 based on 2 Stage Free Cash Flow to Equity
• ThredUp's US$1.75 share price signals that it might be 22% undervalued
• Analyst price target for TDUP is US$4.17, which is 86% above our fair value estimate

Does the April share price for ThredUp Inc. (NASDAQ:TDUP) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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 ThredUp

Step By Step Through The Calculation

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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	-US$22.6m	US$5.10m	US$7.66m	US$10.4m	US$13.1m	US$15.5m	US$17.7m	US$19.5m	US$21.1m	US$22.4m
Growth Rate Estimate Source	Analyst x3	Analyst x4	Est @ 50.24%	Est @ 35.85%	Est @ 25.78%	Est @ 18.74%	Est @ 13.80%	Est @ 10.35%	Est @ 7.93%	Est @ 6.24%
Present Value ($, Millions) Discounted @ 7.9%	-US$21.0	US$4.4	US$6.1	US$7.7	US$8.9	US$9.8	US$10.4	US$10.6	US$10.6	US$10.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$58m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 7.9%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$22m× (1 + 2.3%) ÷ (7.9%– 2.3%) = US$405m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$405m÷ ( 1 + 7.9%)¹⁰= US$188m

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$246m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$1.8, the company appears a touch undervalued at a 22% 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.

Important Assumptions

Now 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 ThredUp 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 7.9%, which is based on a levered beta of 1.230. 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 ThredUp

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. 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. What is the reason for the share price sitting below the intrinsic value? For ThredUp, we've compiled three fundamental elements you should assess:

1. Risks: For instance, we've identified 2 warning signs for ThredUp that you should be aware of.
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for TDUP'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks 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.