Is Ondas Holdings Inc. (NASDAQ:ONDS) Trading At A 37% Discount?

Key Insights

• The projected fair value for Ondas Holdings is US$1.13 based on 2 Stage Free Cash Flow to Equity
• Ondas Holdings' US$0.71 share price signals that it might be 37% undervalued
• Our fair value estimate is 51% lower than Ondas Holdings' analyst price target of US$2.33

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Ondas Holdings Inc. (NASDAQ:ONDS) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Ondas Holdings

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 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	-US$21.6m	US$2.04m	US$3.00m	US$4.02m	US$5.00m	US$5.89m	US$6.66m	US$7.33m	US$7.89m	US$8.37m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 47.39%	Est @ 33.89%	Est @ 24.44%	Est @ 17.82%	Est @ 13.19%	Est @ 9.95%	Est @ 7.68%	Est @ 6.09%
Present Value ($, Millions) Discounted @ 8.3%	-US$20.0	US$1.7	US$2.4	US$2.9	US$3.4	US$3.6	US$3.8	US$3.9	US$3.8	US$3.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$9.3m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 8.3%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$8.4m× (1 + 2.4%) ÷ (8.3%– 2.4%) = US$144m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$144m÷ ( 1 + 8.3%)¹⁰= US$65m

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$74m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$0.7, the company appears quite good value at a 37% discount to where the stock price trades currently. 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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Ondas Holdings 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 8.3%, which is based on a levered beta of 1.290. 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 Ondas Holdings

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. 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. Why is the intrinsic value higher than the current share price? For Ondas Holdings, we've put together three fundamental elements you should assess:

1. Risks: Take risks, for example - Ondas Holdings has 5 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
2. Future Earnings: How does ONDS'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQCM every day. If you want to find the calculation for other stocks 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.