The projected fair value for Pure Storage is US$68.74 based on 2 Stage Free Cash Flow to Equity
Current share price of US$54.41 suggests Pure Storage is potentially 21% undervalued
Our fair value estimate is 24% higher than Pure Storage's analyst price target of US$55.26
How far off is Pure Storage, Inc. (NYSE:PSTG) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
The Model
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF ($, Millions)
US$498.0m
US$536.3m
US$624.4m
US$778.8m
US$1.00b
US$1.21b
US$1.37b
US$1.50b
US$1.61b
US$1.71b
Growth Rate Estimate Source
Analyst x7
Analyst x7
Analyst x5
Analyst x2
Analyst x2
Analyst x2
Est @ 12.95%
Est @ 9.78%
Est @ 7.56%
Est @ 6.00%
Present Value ($, Millions) Discounted @ 7.7%
US$462
US$462
US$500
US$578
US$690
US$775
US$813
US$828
US$827
US$814
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$6.7b
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 (2.4%) 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 7.7%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$33b÷ ( 1 + 7.7%)10= US$16b
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$22b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$54.4, the company appears a touch undervalued at a 21% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
The Assumptions
We would point out that 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 Pure Storage 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 7.7%, which is based on a levered beta of 1.161. 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 Pure Storage
Strength
Debt is not viewed as a risk.
Balance sheet summary for PSTG.
Weakness
Earnings declined over the past year.
Shareholders have been diluted in the past year.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Good value based on P/S ratio and estimated fair value.
Threat
Revenue is forecast to grow slower than 20% per year.
What else are analysts forecasting for PSTG?
Next Steps:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Why is the intrinsic value higher than the current share price? For Pure Storage, we've compiled three further items you should look at:
Risks: As an example, we've found 3 warning signs for Pure Storage that you need to consider before investing here.
Future Earnings: How does PSTG'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: 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.
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.
關鍵見解
根據兩階段自由現金流向股本計算,Pure Storage的預計公允價值爲68.74美元
目前的股價爲54.41美元,表明Pure Storage可能被低估了21%
我們的公允價值估計比Pure Storage分析師設定的55.26美元的目標股價高出24%
Pure Storage, Inc.(紐約證券交易所代碼:PSTG)距離其內在價值有多遠?使用最新的財務數據,我們將通過預測未來的現金流,然後將其折現爲今天的價值,來研究股票的定價是否合理。爲此,我們將利用折扣現金流 (DCF) 模型。在你認爲自己無法理解之前,請繼續閱讀!實際上,它沒有你想象的那麼複雜。
儘管重要,但DCF的計算不應是你在研究公司時唯一考慮的指標。使用DCF模型不可能獲得萬無一失的估值。相反,DCF模型的最佳用途是測試某些假設和理論,看看它們是否會導致公司被低估或高估。如果一家公司以不同的速度增長,或者其股本成本或無風險利率急劇變化,則產出可能會大不相同。爲什麼內在價值高於當前股價?對於 Pure 存儲,我們還整理了另外三個值得關注的項目: