Estimating The Intrinsic Value Of Innoviz Technologies Ltd. (NASDAQ:INVZ)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Innoviz Technologies fair value estimate is US$1.71
• Current share price of US$1.50 suggests Innoviz Technologies is potentially trading close to its fair value
• Analyst price target for INVZ is US$8.17, which is 377% above our fair value estimate

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Innoviz Technologies Ltd. (NASDAQ:INVZ) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Innoviz Technologies

Is Innoviz Technologies 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 begin with, we have to get estimates of 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	-US$97.0m	-US$35.5m	US$12.0m	US$17.4m	US$23.0m	US$28.4m	US$33.2m	US$37.3m	US$40.8m	US$43.8m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Analyst x1	Est @ 45.18%	Est @ 32.27%	Est @ 23.24%	Est @ 16.91%	Est @ 12.48%	Est @ 9.38%	Est @ 7.21%
Present Value ($, Millions) Discounted @ 9.1%	-US$88.9	-US$29.8	US$9.2	US$12.3	US$14.9	US$16.9	US$18.1	US$18.6	US$18.7	US$18.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$8.4m

The second stage is also known as Terminal Value, this is the business's cash flow after 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 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 9.1%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$44m× (1 + 2.2%) ÷ (9.1%– 2.2%) = US$646m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$646m÷ ( 1 + 9.1%)¹⁰= US$271m

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$280m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$1.5, the company appears about fair value at a 12% discount to where the stock price trades currently. 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. 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 Innoviz Technologies 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 9.1%, which is based on a levered beta of 1.140. 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 Innoviz Technologies

Moving On:

Although the valuation of a company is important, 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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. 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 Innoviz Technologies, we've compiled three further items you should explore:

1. Risks: Be aware that Innoviz Technologies is showing 4 warning signs in our investment analysis , you should know about...
2. Future Earnings: How does INVZ'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. 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.