Stock Analysis

Is nCino, Inc. (NASDAQ:NCNO) Trading At A 25% Discount?

NasdaqGS:NCNO
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Key Insights

  • The projected fair value for nCino is US$41.85 based on 2 Stage Free Cash Flow to Equity
  • nCino is estimated to be 25% undervalued based on current share price of US$31.51
  • Analyst price target for NCNO is US$32.36 which is 23% below our fair value estimate

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of nCino, Inc. (NASDAQ:NCNO) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

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.

View our latest analysis for nCino

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. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF ($, Millions) US$41.0m US$59.0m US$95.8m US$138.2m US$182.0m US$223.5m US$260.6m US$292.6m US$319.6m US$342.3m
Growth Rate Estimate Source Analyst x4 Analyst x4 Est @ 62.36% Est @ 44.30% Est @ 31.65% Est @ 22.80% Est @ 16.61% Est @ 12.27% Est @ 9.23% Est @ 7.11%
Present Value ($, Millions) Discounted @ 7.2% US$38.3 US$51.4 US$77.9 US$105 US$129 US$148 US$161 US$168 US$172 US$172

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

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 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 7.2%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$342m× (1 + 2.2%) ÷ (7.2%– 2.2%) = US$7.0b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$7.0b÷ ( 1 + 7.2%)10= US$3.5b

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$4.7b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$31.5, the company appears a touch undervalued at a 25% 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.

dcf
NasdaqGS:NCNO Discounted Cash Flow September 12th 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. 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 nCino 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 7.2%, which is based on a levered beta of 1.000. 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 nCino

Strength
  • Currently debt free.
Weakness
  • No major weaknesses identified for NCNO.
Opportunity
  • Forecast to reduce losses next year.
  • Has sufficient cash runway for more than 3 years based on current free cash flows.
  • Trading below our estimate of fair value by more than 20%.
Threat
  • Not expected to become profitable over the next 3 years.

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For nCino, we've compiled three important aspects you should explore:

  1. Risks: Case in point, we've spotted 2 warning signs for nCino you should be aware of.
  2. Future Earnings: How does NCNO'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: Do you like a good all-rounder? 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 valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.

Valuation is complex, but we're helping make it simple.

Find out whether nCino is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.