An Intrinsic Value Calculation For Palo Alto Networks Inc (PANW) Shows Investors Are Overpaying
I am going to run you through how I calculated the intrinsic value of Palo Alto Networks Inc (NYSE:PANW) using the discounted cash flow (DCF) method. 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 Palo Alto Networks here.
What’s the value?
I’ve used the 2-stage growth 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. Firstly, I pulled together the analyst consensus estimates of PANW’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 10.15%. This resulted in a present value of 5-year cash flow of $3,179M. Want to understand how I calculated this value? Read our detailed analysis here.
The graph above shows how PANW’s top and bottom lines are expected to move going forward, which should give you an idea of PANW’s outlook. Next, 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 perpetual 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 $6,548M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $9,727M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $105.76, which, compared to the current share price of $142.72, we find that Palo Alto Networks is rather overvalued at the time of writing.
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 PANW, there are three key aspects you should further research:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE 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.
