An intrinsic calculation for Intel Corporation (NASDAQ:INTC) suggests it is undervalued by 34%
In this article, we will estimate the intrinsic value of Intel Corporation (NASDAQ:INTC) by taking expected future cash flows and discounting them to their present value. One way to do this is to use the discounted cash flow (DCF) model. Before you think you can’t figure it out, just read on! It’s actually a lot less complex than you might imagine.
Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something that interests you.
Check out our latest analysis for Intel
crush numbers
We use what is called a 2-step model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. To begin with, we need to obtain cash flow estimates for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
A DCF is based on the idea that a dollar in the future is worth less 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
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF ($, millions) | US$6.11 billion | $4.32 billion | $15.6 billion | $17.7 billion | $19.2 billion | $20.4 billion | $21.5 billion | $22.4 billion | $23.2 billion | $23.9 billion |
Growth rate estimate Source | Analyst x10 | Analyst x7 | Analyst x1 | Analyst x2 | Is at 8.5% | Is at 6.54% | Is at 5.16% | Is at 4.2% | Is at 3.53% | Is at 3.06% |
Present value (millions of dollars) discounted at 7.2% | $5,700 | $3.8,000 | $12,700 | $13,400 | $13,500 | $13,400 | $13,200 | $12,800 | $12,400 | $11,900 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = $113 billion
We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 7.2%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = US$24 billion × (1 + 2.0%) ÷ (7.2%–2.0%) = US$462 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= US$462 billion ÷ (1 + 7.2%)^{ten}= 229 billion US dollars
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is $342 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of $55.7, the company appears to be pretty good value at a 34% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep that in mind.
Important assumptions
We emphasize that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you disagree with these results, try the math yourself and play around with the assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Intel 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 factors in debt. In this calculation, we used 7.2%, which is based on a leveraged beta of 1.206. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Next steps:
Valuation is only one side of the coin in terms of crafting your investment thesis, and it shouldn’t be the only metric you look at when researching a company. It is not possible to obtain an infallible valuation with a DCF model. Instead, the best use of 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 pace, or if its cost of equity or risk-free rate changes sharply, output may be very different. Why is intrinsic value higher than the current stock price? For Intel, we have collected three relevant aspects that you should examine in more detail:
- Risks: Every business has them, and we’ve spotted 1 warning sign for Intel you should know.
- Management: Did insiders increase their shares to take advantage of market sentiment about INTC’s future prospects? View our management and board analysis with insights into CEO compensation and governance factors.
- Other strong companies: Low debt, high returns on equity and good past performance are essential to a strong business. Why not explore our interactive list of stocks with strong trading fundamentals to see if there are any other companies you may not have considered!
PS. The Simply Wall St app performs a daily updated cash flow assessment for each NASDAQGS stock. If you want to find the calculation for other stocks, search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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