Is CCC Intelligent Solutions Holdings Inc. (NASDAQ:CCCS) Expensive For A Reason? A Look At Its Intrinsic Value
Key Insights
Using the 2 Stage Free Cash Flow to Equity, CCC Intelligent Solutions Holdings fair value estimate is US$7.42
Current share price of US$9.16 suggests CCC Intelligent Solutions Holdings is potentially 24% overvalued
Our fair value estimate is 36% lower than CCC Intelligent Solutions Holdings' analyst price target of US$11.50
How far off is CCC Intelligent Solutions Holdings Inc. (NASDAQ:CCCS) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
View our latest analysis for CCC Intelligent Solutions Holdings
Crunching The Numbers
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Levered FCF ($, Millions) | US$233.0m | US$249.0m | US$322.5m | US$298.0m | US$315.0m | US$328.3m | US$340.0m | US$350.7m | US$360.6m | US$370.0m |
Growth Rate Estimate Source | Analyst x1 | Analyst x2 | Analyst x2 | Analyst x1 | Analyst x1 | Est @ 4.21% | Est @ 3.58% | Est @ 3.14% | Est @ 2.83% | Est @ 2.61% |
Present Value ($, Millions) Discounted @ 8.5% | US$215 | US$212 | US$253 | US$215 | US$210 | US$202 | US$193 | US$183 | US$174 | US$164 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$2.0b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 8.5%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$370m× (1 + 2.1%) ÷ (8.5%– 2.1%) = US$5.9b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$5.9b÷ ( 1 + 8.5%)10= US$2.6b
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$4.7b. 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$9.2, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Important Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 CCC Intelligent Solutions 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 8.5%, which is based on a levered beta of 1.069. 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 CCC Intelligent Solutions Holdings
Strength
Debt is well covered by cash flow.
Weakness
Interest payments on debt are not well covered.
Expensive based on P/S ratio and estimated fair value.
Shareholders have been diluted in the past year.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Threat
Revenue is forecast to grow slower than 20% per year.
Looking Ahead:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. 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. What is the reason for the share price exceeding the intrinsic value? For CCC Intelligent Solutions Holdings, we've put together three important aspects you should look at:
Risks: Take risks, for example - CCC Intelligent Solutions Holdings has 1 warning sign we think you should be aware of.
Future Earnings: How does CCCS'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 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 NASDAQGS every day. If you want to find the calculation for other stocks just search here.
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.
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