Intrinsic Calculation For Pegasystems Inc (NASDAQ:PEGA) Shows Investors Are Overpaying
How far off is Pegasystems Inc (NASDAQ:PEGA) 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. Also note that this article was written in May 2018 so be sure check the latest calculation for Pegasystems here.
Crunching the numbers
I’ve used the 2-stage growth model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To begin, I took the analyst consensus estimates of PEGA’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 9.4%. This resulted in a present value of 5-year cash flow of US$726.68M. Keen to understand how I calculated this value? Read our detailed analysis here.
The infographic above illustrates how PEGA’s top and bottom lines are expected to move going forward, which should give you an idea of PEGA’s outlook. Then, I determine the terminal value, which is the business’s cash flow after the first stage. I’ve decided 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. Discounting the terminal value back five years gives us a present value of US$2.97B.
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 US$3.69B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $47.01, which, compared to the current share price of $63.2, we find that Pegasystems is rather overvalued at the time of writing.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it 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 PEGA, there are three key aspects you should look at:
Financial Health: Does PEGA 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.
Future Earnings: How does PEGA’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of PEGA? 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.
