Today we will run through one way of estimating the intrinsic value of Hims & Hers Health, Inc. (NYSE:HIMS) 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. Don’t get put off by the jargon, the math behind it is actually quite straightforward.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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.
The Method
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today’s value:
10-year free cash flow (FCF) estimate
|
2025 |
2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
|
|
Levered FCF ($, Millions) |
US$249.4m |
US$322.0m |
US$377.4m |
US$425.9m |
US$467.8m |
US$503.8m |
US$535.2m |
US$562.9m |
US$587.9m |
US$611.1m |
|
Growth Rate Estimate Source |
Analyst x1 |
Analyst x1 |
Est @ 17.20% |
Est @ 12.86% |
Est @ 9.83% |
Est @ 7.71% |
Est @ 6.22% |
Est @ 5.18% |
Est @ 4.45% |
Est @ 3.94% |
|
Present Value ($, Millions) Discounted @ 6.2% |
US$235 |
US$285 |
US$315 |
US$335 |
US$346 |
US |
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 (2.8%) 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 6.2%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$611m× (1 + 2.8%) ÷ (6.2%– 2.8%) = US$18b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$18b÷ ( 1 + 6.2%)10= US$9.9b
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$13b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$49.3, the company appears about fair value at a 18% 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.
Important Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Hims & Hers Health 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 6.2%, which is based on a levered beta of 0.800. 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 Hims & Hers Health
Strength
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Currently debt free.
Weakness
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No major weaknesses identified for HIMS.
Opportunity
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Annual earnings are forecast to grow faster than the American market.
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Current share price is below our estimate of fair value.
Threat
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Revenue is forecast to grow slower than 20% per year.
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. For Hims & Hers Health, we’ve put together three fundamental aspects you should explore:
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Risks: Take risks, for example – Hims & Hers Health has 1 warning sign we think you should be aware of.
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Future Earnings: How does HIMS’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.
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Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
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.