A Look At The Intrinsic Value Of Interlink Electronics, Inc. (NASDAQ:LINK)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Interlink Electronics fair value estimate is US$3.36
• Current share price of US$4.02 suggests Interlink Electronics is potentially trading close to its fair value
• Interlink Electronics' peers seem to be trading at a higher premium to fair value based onthe industry average of -27%

In this article we are going to estimate the intrinsic value of Interlink Electronics, Inc. (NASDAQ:LINK) by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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 Interlink Electronics

Is Interlink Electronics Fairly Valued?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	US$815.3k	US$1.06m	US$1.28m	US$1.49m	US$1.66m	US$1.81m	US$1.94m	US$2.04m	US$2.14m	US$2.22m
Growth Rate Estimate Source	Est @ 41.38%	Est @ 29.68%	Est @ 21.49%	Est @ 15.76%	Est @ 11.74%	Est @ 8.94%	Est @ 6.97%	Est @ 5.59%	Est @ 4.63%	Est @ 3.95%
Present Value ($, Millions) Discounted @ 7.4%	US$0.8	US$0.9	US$1.0	US$1.1	US$1.2	US$1.2	US$1.2	US$1.2	US$1.1	US$1.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$11m

The second stage is also known as Terminal Value, this is the business's cash flow after 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 (2.4%) 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 7.4%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$2.2m× (1 + 2.4%) ÷ (7.4%– 2.4%) = US$46m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$46m÷ ( 1 + 7.4%)¹⁰= US$22m

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$33m. 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$4.0, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

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 Interlink Electronics 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 7.4%, which is based on a levered beta of 1.084. 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 Interlink Electronics

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Interlink Electronics, we've compiled three additional items you should further examine:

1. Risks: Every company has them, and we've spotted 3 warning signs for Interlink Electronics (of which 1 is a bit concerning!) you should know about.
2. Future Earnings: How does LINK'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.