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Calculating The Intrinsic Value Of MaxLinear, Inc. (NYSE:MXL)

Devin Koller

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Does the February share price for MaxLinear, Inc. (NYSE:MXL) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by projecting its future cash flows and then discounting them to today’s value. I will use the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in February 2019 so be sure check out the updated calculation by following the link below.

Check out our latest analysis for MaxLinear

Is MXL fairly valued?

I’m 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 perpetual stable growth rate. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow forecast

2019 2020 2021 2022 2023
Levered FCF ($, Millions) $79.00 $106.00 $125.08 $146.34 $169.76
Source Analyst x1 Analyst x1 Est @ 18%, capped from 24.87% Est @ 17%, capped from 24.87% Est @ 16%, capped from 24.87%
Present Value Discounted @ 11.93% $70.58 $84.61 $89.20 $93.25 $96.64

Present Value of 5-year Cash Flow (PVCF)= US$434m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.7%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 11.9%.

Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = US$170m × (1 + 2.7%) ÷ (11.9% – 2.7%) = US$1.9b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$1.9b ÷ ( 1 + 11.9%)5 = US$1.1b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$1.5b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $21.76. Compared to the current share price of $23.13, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

NYSE:MXL Intrinsic value, February 22nd 2019

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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at MaxLinear as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 11.9%, which is based on a levered beta of 1.265. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For MXL, I’ve put together three relevant factors you should further examine:

  1. Financial Health: Does MXL 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 MXL’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: Are there other high quality stocks you could be holding instead of MXL? 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 NYSE every 6 hours. If you want to find the calculation for other stocks just search here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.