Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Varonis Systems Inc (NASDAQ:VRNS) as an investment opportunity. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in February 2018 so be sure check the latest calculation for Varonis Systems here.
Is VRNS fairly valued?
I’ve used the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To begin, I pulled together the analyst consensus estimates of VRNS’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 9.21%. This resulted in a present value of 5-year cash flow of $218.3M. Want to know how I calculated this value? Take a look at our detailed analysis here.
The graph above shows how VRNS’s earnings are expected to move in the future, which should give you some color on VRNS’s outlook. Then, I determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes $1,045.5M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is $1,263.9M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $45.40, which, compared to the current share price of $52.05, we see that Varonis Systems is fair value, maybe slightly overvalued and not available at a discount at this time.
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For VRNS, I’ve compiled three pertinent aspects you should further examine:
- 1. Financial Health: Does VRNS have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- 2. Future Earnings: How does VRNS’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.
- 2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of VRNS? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.