An Intrinsic Value Calculation For Momo Inc (MOMO) Shows It’s 20.14% Undervalued
In this article I am going to calculate the intrinsic value of Momo Inc (NASDAQ:MOMO) using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in November 2017 so be sure check the latest calculation for Momo here.
Crunching the numbers
We are going to use a two-stage DCF model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To begin, I use the analyst consensus forecast of MOMO’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 11.76%. This resulted in a present value of 5-year cash flow of $2,188M. Want to know how I arrived at this number? Check out our detailed analysis here.
Above is a visual representation of how MOMO’s top and bottom lines are expected to move in the future, which should give you some color on MOMO’s outlook. Then, I determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate 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. After discounting the terminal value back five years, the present value becomes $5,441M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $7,629M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $38.69, which, compared to the current share price of $30.9, we find that Momo is about right, perhaps slightly undervalued at a 20.14% discount to what it is available for right now.
Next Steps:
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 MOMO, I’ve put together three relevant aspects 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.
