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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. 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 first is the discount rate and the other is the cash flows. The calculation above is very dependent on two assumptions. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Relative to the current share price of US$9.3, the company appears quite undervalued at a 42% discount to where the stock price trades currently. The last step is to then divide the equity value by the number of shares outstanding. 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$9.6b. 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 9.3%. In this case we have used the 5-year average of the 10-year government bond yield (2.1%) to estimate future growth. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. We do this to reflect that growth tends to slow more in the early years than it does in later years.Ī DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

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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. 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. In the first stage we need to estimate the cash flows to the business over the next ten years. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.Ĭheck out our latest analysis for Plug Power The Calculation However, a DCF is just one valuation metric among many, and it is not without flaws. We generally believe that a company's value is the present value of all of the cash it will generate in the future. Believe it or not, it's not too difficult to follow, as you'll see from our example! We will use the Discounted Cash Flow (DCF) model on this occasion. ( NASDAQ:PLUG) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Plug Power Inc.

The US$23.55 analyst price target for PLUG is 46% more than our estimate of fair value Plug Power's US$9.29 share price signals that it might be 42% undervalued Using the 2 Stage Free Cash Flow to Equity, Plug Power fair value estimate is US$16.10