Are Investors Undervaluing Wishpond Technologies Ltd. (CVE:WISH) By 50%?

Key Insights

• Wishpond Technologies' estimated fair value is CA$1.40 based on 2 Stage Free Cash Flow to Equity

• Current share price of CA$0.70 suggests Wishpond Technologies is potentially 50% undervalued

• Our fair value estimate is 16% lower than Wishpond Technologies' analyst price target of CA$1.66

Does the April share price for Wishpond Technologies Ltd. (CVE:WISH) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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.

View our latest analysis for Wishpond Technologies

The Calculation

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 begin with, we have to get estimates of 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, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CA$, Millions)	CA$1.70m	CA$2.19m	CA$2.64m	CA$3.03m	CA$3.37m	CA$3.65m	CA$3.88m	CA$4.08m	CA$4.25m	CA$4.40m
Growth Rate Estimate Source	Analyst x1	Est @ 28.55%	Est @ 20.58%	Est @ 15.00%	Est @ 11.10%	Est @ 8.37%	Est @ 6.45%	Est @ 5.11%	Est @ 4.18%	Est @ 3.52%
Present Value (CA$, Millions) Discounted @ 6.5%	CA$1.6	CA$1.9	CA$2.2	CA$2.4	CA$2.5	CA$2.5	CA$2.5	CA$2.5	CA$2.4	CA$2.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$23m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 6.5%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CA$4.4m× (1 + 2.0%) ÷ (6.5%– 2.0%) = CA$99m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$99m÷ ( 1 + 6.5%)¹⁰= CA$53m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CA$75m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CA$0.7, the company appears quite good value at a 50% discount to where the stock price trades currently. 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

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Wishpond Technologies 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 6.5%, which is based on a levered beta of 0.984. 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 Wishpond Technologies

Strength

• Currently debt free.

Weakness

• No major weaknesses identified for WISH.

Opportunity

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

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

Threat

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

Looking Ahead:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. 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. Can we work out why the company is trading at a discount to intrinsic value? For Wishpond Technologies, we've put together three fundamental elements you should consider:

1. Risks: Every company has them, and we've spotted 3 warning signs for Wishpond Technologies (of which 1 doesn't sit too well with us!) you should know about.

2. Future Earnings: How does WISH'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.

3. 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 Canadian stock every day, so if you want to find the intrinsic value of any other stock just search here.

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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.