Wix.com Ltd. (NASDAQ:WIX) Shares Could Be 45% Below Their Intrinsic Value Estimate
Key Insights
The projected fair value for Wix.com is US$175 based on 2 Stage Free Cash Flow to Equity
Wix.com is estimated to be 45% undervalued based on current share price of US$95.23
Our fair value estimate is 47% higher than Wix.com's analyst price target of US$119
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Wix.com Ltd. (NASDAQ:WIX) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Check out our latest analysis for Wix.com
Step By Step Through The Calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$302.1m | US$442.9m | US$537.9m | US$642.4m | US$719.9m | US$785.3m | US$840.4m | US$887.0m | US$927.2m | US$962.6m |
Growth Rate Estimate Source | Analyst x12 | Analyst x5 | Analyst x2 | Analyst x2 | Est @ 12.06% | Est @ 9.09% | Est @ 7.01% | Est @ 5.55% | Est @ 4.53% | Est @ 3.82% |
Present Value ($, Millions) Discounted @ 9.2% | US$277 | US$371 | US$413 | US$452 | US$464 | US$463 | US$454 | US$439 | US$420 | US$399 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$4.2b
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 (2.2%) 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 9.2%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$963m× (1 + 2.2%) ÷ (9.2%– 2.2%) = US$14b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$14b÷ ( 1 + 9.2%)10= US$5.8b
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$9.9b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$95.2, the company appears quite good value at a 45% 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
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 Wix.com 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 9.2%, which is based on a levered beta of 1.162. 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 Wix.com
Strength
Debt is well covered by earnings and cashflows.
Weakness
No major weaknesses identified for WIX.
Opportunity
Expected to breakeven next year.
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
Total liabilities exceed total assets, which raises the risk of financial distress.
Moving On:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For Wix.com, we've compiled three important factors you should further examine:
Risks: As an example, we've found 1 warning sign for Wix.com that you need to consider before investing here.
Future Earnings: How does WIX'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.