Is Integrated Device Technology Inc (NASDAQ:IDTI) Expensive For A Reason? A Look At The Intrinsic Value

Does the share price for Integrated Device Technology Inc (NASDAQ:IDTI) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by projecting its future cash flows and then discounting them to today’s value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in June 2018 so be sure check out the updated calculation by following the link below. View out our latest analysis for Integrated Device Technology

Crunching the numbers

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 five years of cash flows. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. The sum of these cash flows is then discounted to today’s value.

5-year cash flow forecast

2018 2019 2020 2021 2022
Levered FCF ($, Millions) $212.00 $203.00 $229.26 $258.93 $292.42
Source Analyst x1 Analyst x1 Extrapolated @ (12.94%) Extrapolated @ (12.94%) Extrapolated @ (12.94%)
Present Value Discounted @ 10.51% $191.84 $166.23 $169.89 $173.63 $177.44

Present Value of 5-year Cash Flow (PVCF)= US$879.03m

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 10.5%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$292.42m × (1 + 2.9%) ÷ (10.5% – 2.9%) = US$3.98b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$3.98b ÷ ( 1 + 10.5%)5 = US$2.42b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$3.30b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of $25.5. Relative to the current share price of $34.45, the stock is rather overvalued and not available at a discount at this time.

NasdaqGS:IDTI Intrinsic Value June 21st 18
NasdaqGS:IDTI Intrinsic Value June 21st 18

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Integrated Device Technology as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 10.5%, which is based on a levered beta of 1.072. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For IDTI, I’ve put together three important aspects you should further research:

  1. Financial Health: Does IDTI have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does IDTI’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of IDTI? 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 for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks just search here.