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- NasdaqGS:NSIT
Insight Enterprises, Inc.'s (NASDAQ:NSIT) Intrinsic Value Is Potentially 21% Below Its Share Price
Key Insights
- The projected fair value for Insight Enterprises is US$118 based on 2 Stage Free Cash Flow to Equity
- Current share price of US$149 suggests Insight Enterprises is potentially 26% overvalued
- Analyst price target for NSIT is US$140, which is 19% above our fair value estimate
In this article we are going to estimate the intrinsic value of Insight Enterprises, Inc. (NASDAQ:NSIT) by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
View our latest analysis for Insight Enterprises
Step By Step Through The Calculation
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$251.5m | US$267.3m | US$280.8m | US$292.5m | US$302.8m | US$312.3m | US$321.1m | US$329.4m | US$337.5m | US$345.4m |
Growth Rate Estimate Source | Analyst x2 | Est @ 6.30% | Est @ 5.04% | Est @ 4.16% | Est @ 3.55% | Est @ 3.11% | Est @ 2.81% | Est @ 2.60% | Est @ 2.45% | Est @ 2.35% |
Present Value ($, Millions) Discounted @ 9.2% | US$230 | US$224 | US$215 | US$205 | US$195 | US$184 | US$173 | US$162 | US$152 | US$143 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.9b
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 (2.1%) 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 9.2%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$345m× (1 + 2.1%) ÷ (9.2%– 2.1%) = US$4.9b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$4.9b÷ ( 1 + 9.2%)10= US$2.0b
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$3.9b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$149, the company appears slightly overvalued at the time of writing. 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.
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. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Insight Enterprises 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 9.2%, which is based on a levered beta of 1.200. 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 Insight Enterprises
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings and cashflows.
- No major weaknesses identified for NSIT.
- Annual earnings are forecast to grow faster than the American market.
- Good value based on P/E ratio compared to estimated Fair P/E ratio.
- Annual revenue is forecast to grow slower than the American market.
Next Steps:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price exceeding the intrinsic value? For Insight Enterprises, we've put together three further factors you should further examine:
- Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Insight Enterprises , and understanding this should be part of your investment process.
- Future Earnings: How does NSIT'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.
About NasdaqGS:NSIT
Insight Enterprises
Provides information technology, hardware, software, and services in the United States and internationally.
Undervalued with excellent balance sheet.