Is Marathon Digital Holdings, Inc. (NASDAQ:MARA) Expensive For A Reason? A Look At Its Intrinsic Value

Key Insights

• The projected fair value for Marathon Digital Holdings is US$4.79 based on 2 Stage Free Cash Flow to Equity
• Marathon Digital Holdings' US$6.38 share price signals that it might be 33% overvalued
• The US$12.08 analyst price target for MARA is 152% more than our estimate of fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Marathon Digital Holdings, Inc. (NASDAQ:MARA) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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.

See our latest analysis for Marathon Digital Holdings

What's The Estimated Valuation?

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.

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

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF ($, Millions)	US$154.0m	US$142.1m	US$66.8m	US$50.4m	US$42.0m	US$37.4m	US$34.8m	US$33.3m	US$32.5m	US$32.1m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ -24.58%	Est @ -16.59%	Est @ -10.99%	Est @ -7.07%	Est @ -4.33%	Est @ -2.41%	Est @ -1.07%
Present Value ($, Millions) Discounted @ 11%	US$139	US$115	US$48.6	US$33.0	US$24.8	US$19.8	US$16.6	US$14.3	US$12.5	US$11.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$434m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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 (2.1%) 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 11%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = US$32m× (1 + 2.1%) ÷ (11%– 2.1%) = US$361m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$361m÷ ( 1 + 11%)¹⁰= US$125m

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$560m. 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$6.4, the company appears potentially overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Marathon Digital Holdings 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 11%, which is based on a levered beta of 1.529. 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 Marathon Digital Holdings

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and 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 exceeding the intrinsic value? For Marathon Digital Holdings, there are three pertinent factors you should explore:

1. Risks: You should be aware of the 3 warning signs for Marathon Digital Holdings (1 doesn't sit too well with us!) we've uncovered before considering an investment in the company.
2. Future Earnings: How does MARA'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. 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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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.