Key Insights
- Research Solutions' estimated fair value is US$2.89 based on 2 Stage Free Cash Flow to Equity
- With US$2.89 share price, Research Solutions appears to be trading close to its estimated fair value
- Our fair value estimate is 44% lower than Research Solutions' analyst price target of US$5.12
How far off is Research Solutions, Inc. (NASDAQ:RSSS) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
See our latest analysis for Research Solutions
The Calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF ($, Millions) | US$3.50m | US$3.85m | US$4.14m | US$4.39m | US$4.61m | US$4.80m | US$4.98m | US$5.14m | US$5.29m | US$5.44m |
Growth Rate Estimate Source | Analyst x1 | Est @ 9.90% | Est @ 7.64% | Est @ 6.06% | Est @ 4.96% | Est @ 4.18% | Est @ 3.64% | Est @ 3.26% | Est @ 3.00% | Est @ 2.81% |
Present Value ($, Millions) Discounted @ 7.3% | US$3.3 | US$3.3 | US$3.4 | US$3.3 | US$3.2 | US$3.2 | US$3.0 | US$2.9 | US$2.8 | US$2.7 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$31m
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. 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 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 7.3%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$5.4m× (1 + 2.4%) ÷ (7.3%– 2.4%) = US$114m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$114m÷ ( 1 + 7.3%)10= US$56m
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$88m. 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$2.9, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Important Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Research Solutions 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 7.3%, which is based on a levered beta of 1.064. 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 Research Solutions
- Currently debt free.
- Expensive based on P/S ratio and estimated fair value.
- Shareholders have been diluted in the past year.
- Forecast to reduce losses next year.
- Has sufficient cash runway for more than 3 years based on current free cash flows.
- No apparent threats visible for RSSS.
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Research Solutions, we've put together three essential aspects you should consider:
- Risks: As an example, we've found 2 warning signs for Research Solutions that you need to consider before investing here.
- Future Earnings: How does RSSS'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: 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. 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 NasdaqCM:RSSS
Research Solutions
Through its subsidiaries, provides cloud-based software-as-a-service research platform.
Undervalued with excellent balance sheet.