Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Next Games Oyj (HLSE:NXTGMS) as an investment opportunity. 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 May 2018 so be sure check the latest calculation for Next Games Oyj here.
Crunching the numbers
I’ve used the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To begin, I pulled together the analyst consensus estimates of NXTGMS’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.15%. This resulted in a present value of 5-year cash flow of €26.71M. Keen to understand how I arrived at this number? Read our detailed analysis here.
The infographic above illustrates how NXTGMS’s top and bottom lines are expected to move going forward, which should give you some color on NXTGMS’s outlook. Now we need to calculate the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of €134.72M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €161.43M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of €8.84, which, compared to the current share price of €5.9, we find that Next Games Oyj is quite undervalued at a 33.26% discount to what it is available for right now.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and 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 NXTGMS, there are three important aspects you should further research:
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Financial Health: Does NXTGMS have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
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Future Earnings: How does NXTGMS’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of NXTGMS? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!