Intrinsic Calculation For Qualys Inc (NASDAQ:QLYS) Shows Investors Are Overpaying

September 21, 2018

Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Qualys Inc (NASDAQ:QLYS) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. I will use the discounted cash flows (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not September 2018 then I highly recommend you check out the latest calculation for Qualys by following the link below.

Check out our latest analysis for Qualys

Step by step through the calculation

I'm 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 perpetual stable growth rate. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today's value.

5-year cash flow estimate

	2019	2020	2021	2022	2023
Levered FCF ($, Millions)	$115.34	$161.00	$189.98	$222.28	$257.84
Source	Analyst x8	Analyst x1	Est @ 18%, capped from 18.52%	Est @ 17%, capped from 18.52%	Est @ 16%, capped from 18.52%
Present Value Discounted @ 10.75%	$104.15	$131.27	$139.87	$147.76	$154.77

Present Value of 5-year Cash Flow (PVCF)= US$677.8m

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 10.7%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = US$257.8m × (1 + 2.9%) ÷ (10.7% – 2.9%) = US$3.40b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = US$3.40b ÷ ( 1 + 10.7%)⁵ = US$2.04b

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$2.72b. The last step is to then 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) then we use the equivalent number. This results in an intrinsic value of $69.79. Relative to the current share price of $87.35, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

NasdaqGS:QLYS Intrinsic Value Export September 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 Qualys 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 10.7%, which is based on a levered beta of 1.106. 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:

Although the valuation of a company is important, it 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 QLYS, I've put together three important aspects you should look at:

Financial Health: Does QLYS 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.
Future Earnings: How does QLYS'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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of QLYS? 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.

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The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.