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Synaptics Incorporated's (NASDAQ:SYNA) Intrinsic Value Is Potentially 20% Below Its Share Price

Key Insights

  • Synaptics' estimated fair value is US$86.44 based on 2 Stage Free Cash Flow to Equity

  • Current share price of US$108 suggests Synaptics is potentially 25% overvalued

  • Analyst price target for SYNA is US$125, which is 44% above our fair value estimate

Today we will run through one way of estimating the intrinsic value of Synaptics Incorporated (NASDAQ:SYNA) by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Synaptics

The Method

We are going to use a two-stage DCF 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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

US$123.8m

US$150.3m

US$236.1m

US$249.7m

US$261.5m

US$272.0m

US$281.5m

US$290.3m

US$298.6m

US$306.7m

Growth Rate Estimate Source

Analyst x4

Analyst x5

Analyst x4

Est @ 5.77%

Est @ 4.73%

Est @ 4.00%

Est @ 3.49%

Est @ 3.13%

Est @ 2.88%

Est @ 2.70%

Present Value ($, Millions) Discounted @ 9.1%

US$113

US$126

US$182

US$176

US$169

US$161

US$153

US$144

US$136

US$128

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.5b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 9.1%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$307m× (1 + 2.3%) ÷ (9.1%– 2.3%) = US$4.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$4.6b÷ ( 1 + 9.1%)10= US$1.9b

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$3.4b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$108, the company appears slightly overvalued at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
dcf

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Synaptics 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 9.1%, which is based on a levered beta of 1.489. 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.

SWOT Analysis for Synaptics

Strength

  • Debt is not viewed as a risk.

Weakness

  • Expensive based on P/S ratio and estimated fair value.

Opportunity

  • Has sufficient cash runway for more than 3 years based on current free cash flows.

Threat

  • Not expected to become profitable over the next 3 years.

Looking Ahead:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price exceeding the intrinsic value? For Synaptics, we've compiled three relevant elements you should look at:

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

  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for SYNA's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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