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Are Investors Undervaluing ServiceNow, Inc. (NYSE:NOW) By 27%?

In This Article:

Today we will run through one way of estimating the intrinsic value of ServiceNow, Inc. (NYSE:NOW) by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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 ServiceNow

The method

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

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Levered FCF ($, Millions)

US$2.27b

US$2.87b

US$3.34b

US$4.09b

US$5.03b

US$5.72b

US$6.31b

US$6.80b

US$7.21b

US$7.56b

Growth Rate Estimate Source

Analyst x24

Analyst x21

Analyst x5

Analyst x4

Analyst x4

Est @ 13.81%

Est @ 10.25%

Est @ 7.77%

Est @ 6.02%

Est @ 4.81%

Present Value ($, Millions) Discounted @ 6.3%

US$2.1k

US$2.5k

US$2.8k

US$3.2k

US$3.7k

US$4.0k

US$4.1k

US$4.2k

US$4.2k

US$4.1k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$35b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.0%) 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 6.3%.