Commvault Systems, Inc.'s (NASDAQ:CVLT) Intrinsic Value Is Potentially 42% Above Its Share Price

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Commvault Systems fair value estimate is US$140

• Commvault Systems' US$98.39 share price signals that it might be 30% undervalued

• The US$98.65 analyst price target for CVLT is 30% less than our estimate of fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Commvault Systems, Inc. (NASDAQ:CVLT) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Commvault Systems

Crunching The Numbers

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 start off with, we need to estimate 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	US$170.8m	US$192.0m	US$224.6m	US$273.0m	US$296.0m	US$313.4m	US$328.5m	US$341.8m	US$353.8m	US$365.0m
Growth Rate Estimate Source	Analyst x8	Analyst x7	Analyst x5	Analyst x1	Analyst x1	Est @ 5.88%	Est @ 4.80%	Est @ 4.05%	Est @ 3.52%	Est @ 3.15%
Present Value ($, Millions) Discounted @ 6.9%	US$160	US$168	US$184	US$209	US$212	US$210	US$206	US$201	US$194	US$188

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.9b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.3%) 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 6.9%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$365m× (1 + 2.3%) ÷ (6.9%– 2.3%) = US$8.1b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$8.1b÷ ( 1 + 6.9%)¹⁰= US$4.2b

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$6.1b. 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$98.4, the company appears a touch undervalued at a 30% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf

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 Commvault Systems 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 6.9%, which is based on a levered beta of 0.997. 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.

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For Commvault Systems, we've put together three essential items you should explore:

1. Risks: Be aware that Commvault Systems is showing 1 warning sign in our investment analysis , you should know about...

2. Future Earnings: How does CVLT'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: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock 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.