How far off is NetEase Inc (NASDAQ:NTES) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in November 2017 so be sure check the latest calculation for NetEase here.

What’s the value?

I will be using the 2-stage growth 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. Firstly, I pulled together the analyst consensus forecast of NTES’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 11.99%. This resulted in a present value of 5-year cash flow of $63,323M. Keen to know how I arrived at this number? Take a look at our detailed analysis here.

The infographic above illustrates how NTES’s earnings are expected to move going forward, which should give you an idea of NTES’s outlook. Now we need to determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes $134,508M.

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $197,831M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $228.28, which, compared to the current share price of $275.97, we find that NetEase is fair value, maybe slightly overvalued and not available at a discount at this time.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For NTES, I’ve compiled three relevant aspects you should further research:

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.