Stock Analysis

Calculating The Fair Value Of SiTime Corporation (NASDAQ:SITM)

NasdaqGM:SITM
Source: Shutterstock

Key Insights

  • SiTime's estimated fair value is US$147 based on 2 Stage Free Cash Flow to Equity
  • SiTime's US$134 share price indicates it is trading at similar levels as its fair value estimate
  • Our fair value estimate is 4.5% lower than SiTime's analyst price target of US$140

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of SiTime Corporation (NASDAQ:SITM) as an investment opportunity 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.

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 still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for SiTime

What's The Estimated Valuation?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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.

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) estimate

2023202420252026202720282029203020312032
Levered FCF ($, Millions) US$43.0mUS$111.6mUS$144.4mUS$174.0mUS$220.2mUS$254.8mUS$284.5mUS$309.4mUS$330.3mUS$347.9m
Growth Rate Estimate SourceAnalyst x2Analyst x1Analyst x1Analyst x1Analyst x1Est @ 15.73%Est @ 11.63%Est @ 8.76%Est @ 6.75%Est @ 5.35%
Present Value ($, Millions) Discounted @ 9.5% US$39.2US$93.1US$110US$121US$140US$148US$151US$150US$146US$141

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.2b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 9.5%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$348m× (1 + 2.1%) ÷ (9.5%– 2.1%) = US$4.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$4.8b÷ ( 1 + 9.5%)10= US$1.9b

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$3.2b. 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$134, the company appears about fair value at a 8.6% 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
NasdaqGM:SITM Discounted Cash Flow March 6th 2023

Important 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. 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 SiTime 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 9.5%, which is based on a levered beta of 1.246. 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 SiTime

Strength
  • Currently debt free.
Weakness
  • Earnings declined over the past year.
  • Shareholders have been diluted in the past year.
Opportunity
  • Annual earnings are forecast to grow faster than the American market.
  • Current share price is below our estimate of fair value.
Threat
  • Revenue is forecast to grow slower than 20% per year.

Next Steps:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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. For SiTime, there are three relevant factors you should assess:

  1. Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with SiTime , and understanding them should be part of your investment process.
  2. Future Earnings: How does SITM'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 NASDAQGM every day. If you want to find the calculation for other stocks just search here.

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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

About NasdaqGM:SITM

SiTime

Designs, develops, and sells silicon timing systems solutions in Taiwan, Hong Kong, the United States, Singapore, and internationally.

Excellent balance sheet low.

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