How far off is Changyoucom Limited (NASDAQ:CYOU) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this after November 2017 then I highly recommend you check out the latest calculation for Changyou.com here.
What’s the value?
I use what is known as the 2-stage 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 took the analyst consensus estimates of CYOU’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 9.63%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of $827M. Keen to understand how I calculated this value? Take a look at our detailed analysis here.
In the visual above, we see how how CYOU’s top and bottom lines are expected to move going forward, which should give you some color on CYOU’s outlook. Then, I determine the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable 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. The present value of the terminal value after discounting it back five years is $2,070M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $2,898M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $56.80, which, compared to the current share price of $37.79, we see that Changyou.com is quite undervalued at a 33.47% discount to what it is available for right now.
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For CYOU, I’ve put together three important factors you should further research:
PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock 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.