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- NasdaqGS:ADEA
Adeia Inc.'s (NASDAQ:ADEA) Intrinsic Value Is Potentially 46% Above Its Share Price
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Adeia fair value estimate is US$15.40
- Adeia's US$10.51 share price signals that it might be 32% undervalued
- Our fair value estimate is 2.6% higher than Adeia's analyst price target of US$15.00
Does the August share price for Adeia Inc. (NASDAQ:ADEA) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
See our latest analysis for Adeia
Is Adeia Fairly Valued?
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF ($, Millions) | US$121.2m | US$109.1m | US$102.2m | US$98.5m | US$96.8m | US$96.3m | US$96.7m | US$97.7m | US$99.1m | US$100.9m |
Growth Rate Estimate Source | Est @ -15.38% | Est @ -10.01% | Est @ -6.26% | Est @ -3.63% | Est @ -1.79% | Est @ -0.50% | Est @ 0.40% | Est @ 1.03% | Est @ 1.47% | Est @ 1.78% |
Present Value ($, Millions) Discounted @ 7.6% | US$113 | US$94.2 | US$82.0 | US$73.4 | US$67.0 | US$62.0 | US$57.8 | US$54.3 | US$51.2 | US$48.4 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$703m
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 (2.5%) 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 7.6%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$101m× (1 + 2.5%) ÷ (7.6%– 2.5%) = US$2.0b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.0b÷ ( 1 + 7.6%)10= US$968m
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$1.7b. 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$10.5, the company appears quite undervalued at a 32% 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
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 Adeia 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 7.6%, which is based on a levered beta of 1.244. 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 Adeia
- Debt is well covered by cash flow.
- Dividends are covered by earnings and cash flows.
- Earnings declined over the past year.
- Interest payments on debt are not well covered.
- Dividend is low compared to the top 25% of dividend payers in the Software market.
- Shareholders have been diluted in the past year.
- Annual earnings are forecast to grow faster than the American market.
- Good value based on P/E ratio and estimated fair value.
- Revenue is forecast to grow slower than 20% per year.
Moving On:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For Adeia, we've put together three fundamental items you should explore:
- Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Adeia (at least 1 which is potentially serious) , and understanding these should be part of your investment process.
- Future Earnings: How does ADEA'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 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. 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.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
About NasdaqGS:ADEA
Adeia
Operates as a media and semiconductor intellectual property licensing company in the United States, Canada, Asia, Europe, the Middle East, and internationally.
Undervalued with reasonable growth potential.