Is Cognizant Technology Solutions Corporation (NASDAQ:CTSH) Trading At A 44% Discount?

In This Article:

Key Insights

  • The projected fair value for Cognizant Technology Solutions is US$126 based on 2 Stage Free Cash Flow to Equity

  • Cognizant Technology Solutions' US$70.57 share price signals that it might be 44% undervalued

  • Analyst price target for CTSH is US$78.92 which is 37% below our fair value estimate

In this article we are going to estimate the intrinsic value of Cognizant Technology Solutions Corporation (NASDAQ:CTSH) by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Believe it or not, it's not too difficult to follow, as you'll see from our example!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. 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 Cognizant Technology Solutions

The Calculation

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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.

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

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

US$2.19b

US$2.37b

US$2.45b

US$2.41b

US$3.21b

US$3.44b

US$3.64b

US$3.81b

US$3.96b

US$4.10b

Growth Rate Estimate Source

Analyst x10

Analyst x10

Analyst x7

Analyst x2

Analyst x1

Est @ 7.28%

Est @ 5.79%

Est @ 4.74%

Est @ 4.00%

Est @ 3.49%

Present Value ($, Millions) Discounted @ 7.3%

US$2.0k

US$2.1k

US$2.0k

US$1.8k

US$2.3k

US$2.3k

US$2.2k

US$2.2k

US$2.1k

US$2.0k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$21b