WACC

No-Animator-3832

Simplifying a bit here, assuming we only purchase equities because we expect them to throw off some amount of cash flow in the future. The net present value of future cash flows goes down as the interest rate (WACC) goes up. The future cash flows are worth comparatively less.

MoulaMan

Though if the company has zero debt, then higher rates actually improve multiples as they lower discount rates ie cost of equity (assuming an unchanged expected market return) and increase terminal value. Hence why tech stocks that are debt-reliant are hit the hardest when rates increase (their WACC gets worst ie higher although their cost of equity lowers).

blindnessinwhiteness

Sure, but people generally use (for calculating WACC for a private company, let's say) industry beta, am I wrong? So, I'm wondering why, while one would use industry beta while diversification is possible?

cian_100

> The present value of US government bonds can be determined using a discounted cash flow analysis. A discounted cash flow model is used to value the future cash flows, the discount rate for publicly traded equities is the WACC (Weighted Average Cost of Capital). If you want to value the future cash flows of a bond, your discount rate is the bond’s yield to maturity, which can be calculated using information like the price, basis, coupon rate and frequency and years to maturity. Using the risk free rate (10 year US treasury rate as a proxy) you can calculate the credit spread, compare the duration and convexity of the bond vs a risk free investment, determine the yield to maturity of a government bond and calculate the risk-adjusted returns. Depending on your investment goals, you can evaluate if adding bonds to your portfolio is a good idea. Fixed income markets operate differently to equities. Not really sure the relevance of stating that par value bonds are equal to face value when the coupon equals the discount rate, but yes I concur. Though in reality this situation would be quite rare, bond prices fluctuate constantly.

itijara

First, learn how to read a 10-k report to the SEC. What each item on a balance sheet and income statement are. Then look into discounted cash flow methods of valuation as well as CAPM (capital asset pricing model). Those are the very basics of fundamental analysis. You should also learn what WACC is (weighted average cost of capital) and how that can be used for discounting. Those are a good foundation to learn other models. Things like PE ratio are based on DCF (discounted cash flow) with assumptions about how earnings are related to growth. Also look up the Fama-French model, which accounts for differences between industries.

Firm-Layer-7944

Even if the ROI on new projects is less than WACC?

BigAssMop

Everyone here gave you some BS advice to look at books about trading lmao. Sure they’re great but they don’t actually teach you a damn thing about finance. You need to understand basic finance theory. Time value of money, what a WACC is, why is the wacc important, what non cash expenses are, etc. If you don’t understand the company or how to value it then how are you going to bet money on a company being worth more or less than something

Maleficent_Major_337

It depends on the industry. High PE is normal for something sought after along with high PS ratio like tech for example. But by your example specifically I would conclude that stock B may be cheaper but why is unknown. I personally prefer ROIC and ROCE as long as it’s higher than the cost of capital (WACC). If it makes you money I’ll share my search criteria 1. Gross margins must be 25% or greater no flexibility 2. If it pays dividends payout ratio must be <70% 3. Must have underlying competitive advantage or prospects for organic growth 4. In the income statement the interest coverage must be 3 or greater 5. Cash flow from operations must be higher than net income from income statement 6. Cash flow from operations has to be the highest cash flow numbers 7. D/E must be <1 8. On the balance sheet, goodwill should be subtracted from both assets and equity value and should still have more assets than liability 9. ROIC and ROCE must be greater than their WACC through a 10 year span. A few bad years is no biggy. 1,3,5 year Compound annual growth rate (CAGR) of operating margin must be greater than operating expenses growth rate. Growing sales steadily. Then and only then do I consider PE, PS, PB I is my favourite valuation price ratio. Because low PB may tell you the stock price is either cheap or products are outdated and are increasing the asset number. But by having growing sales and growing margins, one can conclude that outdated products are not the case, the stock value may be cheap. I find the best way to value a stock is by Discount cash flow models AND multiples valuation through price rations.

FancyPantsMacGee

Not here to pile on, but some assumptions to look into: \-Robotaxis running 24/7 - unrealistic to assume 100% usage (maybe look into Uber/lyft driver downtime numbers) \-Tesla dropped prices because they can: They dropped prices because competition has increased - they're no longer the only EV on the block \-Tesla's WACC is much higher than 5.5%. Factset has a WACC of 12.3% which would put fair price at $99 per share for a 10 year, $1T company

fwvpsvdituuibyup

That's not true, you’re confusing the idea of discounting cash flows with a DCF (which discounts a specific type of cash flow). A traditional DCF discounts the free cash flow to the company, which is a pre-interest metric. You can't value a bank's cash flows using a pre-interest metric because almost all of any bank’s revenue and expenses are derived from interests... A dividend discount model works just like a normal DCF, but instead of discounting the free cash flow to the company, you discount the actual dividends paid by the company. Dividends are discounted at a different rate than cash flows in a DCF (cost of equity instead of WACC), which indirectly solves OPs issue.

DyehuthyTV

And yes, Peers like $COP have Less Leverage and more ROC, but at the end of the year they have the same ROC-WACC Ratio. That's how their Industry works, with Leverage! A little more, a little less, it doesn't matter. But $OXY does not have "Excessive Leverage" (*Highly!*) As you say ;) https://preview.redd.it/y97y8rsg8bkc1.jpeg?width=917&format=pjpg&auto=webp&s=f837870e4dac765e0eba9dc245784c84d3f7159b

Connect-Elephant4783

In year 10 in AI he is estimating capex to decrease about 50% while maintaining assumptions into TV. Im telling you he is even bullish. Aint NO way that can happen. If you could see that capex goes from 16 bn to 6 bn up to 10 bn in the last 3 years. Now I know he even doesn’t know how to properly value or control the model when going from explicit forecasts period into main driver period into terminal value. He is way to bullish on cash flow and with that growth rate on the cash flow way to low WACC to smooth the riskiness of that cash flow.

smileyboy2016

It may continue going down from where it is but there are not issues with their fundamentals. ROIC, ROE, & ROCE all greater than 30. ROIC outweighs WACC by almost 3 to 1. They've been around since the 90's and have been profitable for each of the last 10 years. It will probably go down in the long run from these ridiculous highs but if you were bought in before the spike or early on there's no reason to freak out.

Fiftyfivepunchman

Super Micro Computer's WACC % is 12.00%. Super Micro Computer's ROIC % is 31.90% (calculated using TTM income statement data). Super Micro Computer generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases. - Guru Focus

Fiftyfivepunchman

I stay away from any company that is having a meme moment. A couple weeks ago it was SoFi. Last week it was PayPal. Palantir is borderline. I spend hours going through dozens of companies per day, vetting them as best as I can through TipRanks GuruFocus and SeekingAlpha and using the research provided through Fidelity (IMO Ford Equity is the best). If they are just having a bad news day but have excellent fundamentals otherwise, I buy calls. It is impossible to go through every single metric in the balance sheet with so many companies so I stick to one consistently, which is WACC vs ROIC. If ROIC is greater or significantly so, I consider it a well managed business. I suppose if the strategy were to be put in a nutshell, I like to plant seeds after a rainy day in fertile soil. Seed is the contract, rainy day is a red day in the market to get in at a discount and fertile soil is the fundamentally sound company. I hope this makes some sense!

Evening-Action1415

That's not what I am talking about, nor what OP is taking about. I think you need to stop beating around the bush and actually know what question is being talking about. Read this from another commentor on this thread: >A lot of stupid comments here. Yes, OP, you're right. If a company never distributed earnings to shareholders (at any time in the future), there's no point being a shareholder. This is one of the reasons non US stocks are less attractive: they don't bend over backwards to support shareholders the same way many US stocks do. The one caveat to this would be the potential for a buy-out. Some small companies don't pay dividends, but are likely to be bought out at some point by a larger company for a price that will be returned to shareholders in cash or new equity. The "but growth!" comments need to be re-articulated. A company that has a higher ROIC than WACC (is generating more earnings as a percentage of invested debt and capital than the debt itself costs), would be better off retaining those earnings and put them to growth prospects rather than distribute them back to shareholders, provided that the business growth is scalable such that increased growth could still generate high ROIC. But this is in the short-term. Eventually, the company would need to distribute earnings to shareholders in order to make it a worthwhile investment for investors.

DyehuthyTV

The Major Problem with $DHR its their Capital Efficiency (ROIC 6-95% - WACC 9.22%) https://preview.redd.it/wzn7letqy5gc1.jpeg?width=429&format=pjpg&auto=webp&s=eb188382f3aacacfd01186e0618d06d2fb589536 But it is not for Shorting (*puts*) LOL And yes, Revenues have been falling, but as almost everywhere else in the Industry like his Peer $TMO (Thermo Fisher Scientific Inc.). Where both are Leading Business on this Indsutry 

unlikelycandidates

ohhhhh it's called *WACC*, I've been calling it *wack* this entire time

My_Nama_Jeff1

I have my bachelors in finance, and am working on a masters right now. I have been doing stock valuations calculating CAPM, WACC, Beta, using that for things like DDM, FCFF, FCFE, RIM, and was actually planning on evaluating on evaluating Costco, can I get those Excel spreadsheets? I would absolutely love that. \~A fellow regard

CAG991

ROCE is definitely an important metric and it’s one of the biggest things I look at when picking an individual stock along with the ROIC - WACC spread. Those metrics in conjunction with earnings growth are mainly what I look for.

Sugamaballz69

What is WACC exactly? Would it be the interest rate on their debt? Is it on their 10Q or do I have to calculate it myself?

Spl00ky

You can use the WACC or go with Buffett's discount rate of the 10 year treasury

Zipski577

UTHR. PAH pharma market is projected to have a revenue cagr around 5-6% through 2030. Previously the market has been primarily dominated by expensive branded drugs but UTHR’s generic breakthrough with Tyvaso has taken a large market share. They also have many more drugs in the pipeline. The health care sector is primed to outperform after 2 bad years. The company’s P/E and FWD P/ E are VERY attractive. Net margin%, ROE, ROA, and PEG are well above biotech sub-sector medians. It’s ROIC is 3x it’s WACC, and it has a very strong balance sheet.

Sugamaballz69

How do I calculate WACC? And so each period to be added on would be FCF for the period minus WACC or is WACC only calculated at the end because you can have multiple periods of cash flows from a single capital investment?

cian_100

> Discounted cash flow is the total amount of cash flows expected over a period of time minus the risk free rate to see how much more cash flows the project brings than risk free cash. You don’t subtract the risk free rate, you discount future free cash flows to present value using a discount rate, for public companies it’s commonly the WACC. Free Cash Flow is calculated as Operating Cash Flow minus Capital Expenditures. It provides a more accurate picture of a project’s ability to generate cash after accounting for necessary investments in assets. So, when conducting a DCF analysis, you would use the projected free cash flows for each period and discount them back to their present value using an appropriate discount rate.

Jeff__Skilling

In theory, share price would remain unaffected since any increase to FCF (by way of price increases to customers) would be canceled out by the increase in WACC (vis a vis your risk free rate) used to arrive at your share price / equity value.

OwwMyFeelins

Bro WACC is ridiculously low. Would you really hold any stock for a 5% expected return?

Its_the_humble_Pi

It's actually not that expensive. 45x next year gaap pe. Cnsider that the only real competition in EV is from China Consider that their GPM is higher than any other auto company giving them a sustained r&d advantage Can I make a bet that the next 10 years, Tesla will grow EPs at least 12%? Maybe 15? That deserves a 40+ PE. A simple 30-year DCF architecture structured to sensitize revenue growth will display this truth. To simplify a complex reality, here I take revenue of $1m at T0 and hold 10% operating margins, 6.5% FCF margins, 35% debt/EV (5.5% interest rate), 10x terminal multiple at year 30, and an 8% WACC in all cases (which is generous to the decliners as usually revenue has beta to margins both ways). DCF implied PE floor for a 5% grower is 15x, a 10% grower floor PE is 30x and 12% grower is 40x. People often fail to grasp this concept and think 40x is an expensive multiple when it is probably a trough for a long term 12% grower like Tesla.

absoluteunitVolcker

Seems like their ROIC is 6.98% and below their WACC? Should destroy value as it grows.

beachandbyte

How do you see fraud being a risk to Baba? I guess my thesis for BABA is we are close enough for me to all time lows, in a large profitable company that is still growing yoy. It’s beat expectations for last 4 earnings giving me some confidence we can hope to see positive catalysts in 2024. It’s ROIC is above its WACC in 2023. I got a good entry with decent resistance so I should be able to know I’m wrong for fairly cheap.

professorpuddle

True. This is why there are teams to do capital budgeting analysis to make sure capital is invested efficiently and above WACC. Looking at past “cycles” does not ensure money is not wasted. In fact, any investment today does not guarantee future fcf growth. On average, it should.

sloppies

Some more details: I think the market is too bearish. Yes the company faces headwinds due to a shrinking toddler population, but these are overblown. My DCF assumes no margin expansion, low top line growth, higher levels of reinvestment relative to history (new store growth), and a high WACC. Their biggest competitor is in financial stress and this creates a possible acquisition target. TLDR: this isn’t Apple. The company isn’t doing great, but it has some opportunities. However, the marker has oversold from its peak of ~$100.

-Coptic-

Curious, for CVNA: How are you getting this cost of capital? I have its debt cost of capital to be 13%, and its equity cost of capital to be 23% if I assume a 6% market risk premium (4.5% + (3.09 \* 6%) = 23%). Then the WACC to be 13% ( (0 \* 23%) + (1 \* 13%) = 13% ) since they are 100% debt financed. I also think that CVNA is overvalued, but I find this valuation to be slightly off.

Alexkono

Very interesting how you calculated WACC, never seen an in-depth analysis like that.

SerEx0

Convertible bonds are a poor man’s debt. By the time they are settled you are looking at a WACC well beyond the cost of a traditional bond issuance plus you dilute the other shareholders. They must be really hurting for cash if they’d resort to convertible notes

UCACashFlow

A 2-stage traditional DCF is a horrible valuation tool. Any small change to a variable leads to wide swings in your valuation. It’s much better to use several approaches to value, and to create high and low ranges based on the company’s long term median and average performance. For example, using the historical earnings method to value and the sustainable growth method, both using high/low based on median and average ROE over the last decade, historical median payout ratios, will yield a much more meaningful valuation range. The more methods you incorporate, the less any sort of average or median of all the values will be swayed by any change in what you input. I also use a 15% discount rate because this is the investment return I demand. My opportunity cost on Company A that I am analyzing is company B, which is some company that exists and will provide a 15% CAGR, so WACC is a total waste of time, as are treasury yields and “risk free” yields. For me, those are no satisfactory alternative. Another thing is you really have to understand how to apply the theory to information you’re looking at. For most companies, 2021-2022 performance is inflated and non recurring. 2023 looks like it may just be the first base year that’s “normal” for most industries. If you apply a DCF to a company using 2012-2022, you’re more than likely going to completely overshoot their future performance. Because of the base effect, and the fact we printed 1/3+ of the money supply from 2021-2022.

Jeff__Skilling

>Is this the wrong way of looking at things? Yes - share prices (or any sort of valuation metric, really) already had inflation priced into it by way of it's discount rate (WACC)

OldMan0919

WACC is a better metric for the companies themselves to use - because it’s theoretically what their investors and debtors, weighted, require for investments. For outsiders valuing a company, it’s irrelevant.

wazzamata

Just fyi, WACC is an average cost of capital for debt and equity holders. If you are an equity investor, you should consider what the cost of equity is. Also, think about how returns are taxed. Might not be very sexy but pre tax returns can look very different after the tax man takes is cut.

joedoepoemoe

I think that’s what WACC is (expected return of investment based on risk profile and opportunity cost of entering an investment of similar risk). Agreed with the Munger idea, WACC is by definition a market defined cost of capital (as is the valuation of all public companies). Finance is definitely more of an art than science

waltwhitman83

wacc formula WACC= \frac {{\sum ^N _{i=1}}{r_i \cdot MV_i}} {{\sum ^N _{i=1}MV_i}} WACC = weighted average cost of capital N = number of sources of capital (securities, types of liabilities) r_i = required rate of return for security i = security MV_i = market value of all outstanding securities 10% is used gross or net of wacc?

Shapen361

I haven't calculated a WACC since college. I could probably dig out my notes and figure out how, but I have no idea how to calculate a risk premium needed for cost of equity.

0PercentLTV

What are some WACC rates you've used for large known companies lately?

0PercentLTV

WACC always seemed peculiar to me. Opportunity cost and expected returns of investments of similar risk seems to make much more sense. For example I've seen WACC calculations ranging from 9.5% to 12% for AAPL. That seems absurd?

joedoepoemoe

Came from an investment banking background, yep 10% is commonly used as a rule of thumb. To calculate a discount rate specific to a company, we usually use WACC (weighted average cost of capital). You can google it and there are sites that explain it way better than I can. Happy to answer any questions you have after reviewing those. In essence, it calculates the weighted rate of return a company’s debt and equity investors expect. This takes into account the weighted average interest of a company’s debt, as well as the expected rate of return equity holders demand given the risk profile of a company

didyoumeanbim

>Is that profit? Net income was positive? > >Positive report. Looks like Auxly isn’t doomed after all. Balls in your court other producers, Auxly just needs to outlast everyone and then take their market share. Isn't that kind of the problem? After excluding the one-time debt refinancing present value gain (which was driven by recalculating the debt with a 27.5% WACC instead of the old 16% WACC), net income for the quarter is $-14.27M, while remaining cash, short-term investments, long-term investments, and assets held for sale combine for $11.81M in assets. Obviously they have Restricted cash, AR, Bioassets, inventory, prepaids, deposits, and other AR (combined $62.61M) and PP&E and Intangible Assets ($226.76), but most of those stay stable in normal business operation (especially now that they've sold off most of their facilities and kept only the future core ones). You could probably eat down at the inventory values a bit ($36.30M) to get some cash, but that's still a short term injection. With their current streamlined operating expenses and their gross profit of around $5M, in order to break even they essentially need to do some combination of 1. quadrupling their sales numbers (without increasing marketing spending), or 2. cutting their CoGS by 3/4ths with the same sales numbers. &nbsp; edit: Alternately, they could break even if they cut their SG&A in half, double their sales volumes, and get Imperial to convert the debt to shares...

CannainvestorG93

You make some fair points definitely and the MSOs will struggle long term once legalization comes due to intense competition but legalization is going to take many years to play out. The state by state model has a very strong change of being in place for atleast 2-4 more years. It really comes down to numbers. It is that simple. Everything you said about Tilray is nice but Tilray is NO WHERE close to Verano in terms of EBITDA, cash flow ETC. And this is all before 280E is potentially removed in near future. It is nice that you are trying to make a comparison but besides revenue, there is simply no comparison right now. It is completely wrong for you to say there is no harm in investing in both LPs and MSOs. The financials and valuations DO NOT compare. LPs are no where close to US MSOs. This is all on top of many massive catalysts that can realistically play out for MSOs over the coming 6-18 months (removal of 280E, uplisting, lower WACC as capital becomes available, use of credit cards, investment from major CPG, Florida going rec, Penn going rec, VA/OH etc). If we are being completely honest Canadian LPs have very little catalysts over next 6-18 months. Germany is a dud for a while so maybe change to excise taxes and decreased competition as companies go under). Are you really going to sit there and tell me there is "no harm in investing in both LPS and MSOs. They both have strengths and risks associated with them." after what I just listed? Its just not true. Sorry.

Jeff__Skilling

We had Factset licensees to pull pricing / other stuff into excel. We really only used the terminal to pull weird crude / gas basis differentials and a few other odds-and-ends (e.g. 5 year beta, or other WACC calculation-related items)

Level_-_Up

There is something known as WACC (working average cost of capital). Every company needs capital (money) and getting that money comes at a cost (folks want a return for lending you money. That usually takes two forms; debt and equity. Debt is when you take out a loan from a bank, equity is when you sell part of the company. If a company issues more shares it may signal that know one trusts them with a loan. However with high interest rates it may also be that selling part of the company is cheaper than taking out a loan. Also keep in mind that issued shares are not the same as shares available for trading. If a company does decide to issue more shares it has to be approved by the board who are all heavy shareholders (I.e they have to vote in favor of devaluing their shares). The rationale for this is usually quite juicy :)

ynghuncho

NAV is still based off the books. Usually it’s only good for Mutual funds where you’re already looking at equity value. >a lot of tangible assets We don’t care. If it doesn’t pay you what’s the point? WACC is already adjusted for risk and capital structure, meaning every company has its own cost of capital.

Screwyball

Retained earnings are usually reinvested in the company and contribute to the growth rate of the company. It helps to look at ROIC in this case, the return on (re)invested capital. It only makes sense for a company to reinvest earnings if the ROIC exceeds the WACC. Alternatively those earnings can be held indefinitely to keep a cash buffer, in which case they would still yield the short term risk free rate. No company will actually hold it in 0% yielding cash

Admiral2Kolchak

Dilettantes using WACC instead of APV and writing the 40% premium off as goodwill.

Cueg

No, cashflow is discounted at the WACC of that particular firms profile. When you are buying a US company, you are buying into a company which finances debt not at the treasury rate, but at the treasury rate plus x basis points. You can't compare it to the risk free rate, you compare it to that firms cost of capital, not the federal governments. That firms cost of capital is going to be higher by definition relative to the risk free treasury rate at any given point in time. Discount rates should actually be rising as interest rates rise across the board. You aren't trying to beat a risk free rate in a DCF cashflow valuation, rather you are attempting to get a dollar amount on the future cashflows. You determine this not by comparing the returns to a risk free investment (like US treasuries), but rather something with a similar risk profile.

sloppies

Your WACC - what method did you use to calculate beta for cost of equity?

gqreader

No the treasury rates which sit at 5% would be too low of a WACC. So obviously the calculation would have to add in the equity risk premium and the company’s cost of debt. The equity risk premium + cost of debt is probably going to fall along the 10% range.

gqreader

most models and analysts I see keep using the 10% as a baseline. Not sure if the 10-12% discount rate is the driver of valuation OR the calculated estimate of the cashflow and exit multiples. I guess they tend not to spend time on the WACC if they feel it doesn’t make a major difference

SWLondonLife

WACC is the average of risk free rate plus equity risk premium and the cost of debt (which is priced at current market conditions for the rating or the prevailing cost of debt for enterprise - depending on the conservatism of the cfo).

SWLondonLife

As a corporate leader, I’d like to dispute. We definitely use WACC in capital budgeting and M&A.

gqreader

So the risk free rate is def part of the hurdle rate. But I think it’s easier to think of it as a baseline of WACC. So there’s a portion of rF and required equity return (unlevered beta). Most folks just use 10% as WACC, or the discount rate. However if you have specific management setting a hurdle rate higher, this is largely due to elevated risk mitigation or higher opportunity costs specific to the organization trying to deploy capital.

thri54

Your WACC weightings are off. $111B of debt is 3% of Apple’s $2900B EV.

n55209

I’m sorry to hear about the tough time you’re going through. It’s a challenging part of the investment journey. I’ve created an ebook, "The Investor's Guide to the Galaxy," that teaches how to valuate stocks, focusing on space companies using the DCF model and WACC for intrinsic value estimation. It's designed to foster independent thinking in investors. This might help you better understand your holdings and possibly alleviate some worry as you plan your long-term investment strategy. Keep learning and stay strong!

ApplePieInvestor

It's great to see your enthusiasm for trading and your openness to learn! In my experience and investing style I find that understanding the valuation of stocks is a pivotal step towards long-term success. I've written an ebook titled [**"The Investor's Guide to the Galaxy''**](https://www.teamxearth.com/) aimed at guiding investors on how to valuate stocks, with a special focus on space companies. The knowledge taught in this book will help you build confidence to determine your own intrinsic value of any company you are interested in. This can greatly aid in your decision to buy, sell or hold equity. It explores the DCF model and the WACC to estimate the “true” value of publicly traded companies in the US. You will find that the technical jargon isn't so daunting. I’ve worked hard to ensure that! The book provides practical knowledge and encourages an independent thinking approach towards investing, with engaging narratives about various companies and investment scenarios. I think it could serve as a valuable resource on your investment learning journey, making the process enjoyable and memorable. Happy investing!

thri54

Too bad the math is totally wrong. Debt is $110B and equity is $2700B, shuck is not a 70/30 weighting like in his WACC. His fair value should be closer to $100 per share.

smileyboy2016

P/E ratios need to be examined in the context of the sector of the business. 11.6 may be a reasonable p/e for a business that makes ball bearings and chains. Increase in sales can often conceal cost of creating sales. TKR's ROIC is barely greater than its WACC. It has been profitable each of the last 10 years but it also has a peg over 1 which is fine but not great in this context as well as a p/b of 2 which is also fine but somewhat mediocre. Cant complain about a decent dividend It is unwise to put too much stock into anyone's price target projection and Gurufocus refers to it as being moderately undervalued You will definitely make money buying this stock and it is certainly at least somewhat undervalued. There is nothing wrong with it but it wouldn't meet my personal criteria to buy and I would think there's plenty of other undervalued stocks with greater financial performance and expectation of growth to put your money into.

TheBarnacle63

US Large Cap not in SP 500 No REITs, MLPs, or Miners Sound Balance Sheets DCF based on revenue AND earnings. Might use free cash flow and WACC.

Jeff__Skilling

You're ignoring the most material part of any valuation exercise.....WACC / discount rate you apply to those future cash flows to arrive at current market cap....

financegeekk

Sorry bro, try this one, investopedia is a better source anyways. In short rising interest rates will increase demand for bonds, and the higher cost to borrow increases WACC which is the denominator in the equation for free cash flows. IE it becomes more expensive for companies to do business and finance their operations, depressing asset prices of stocks. Risk reduces in bonds in this environment while it increases in stocks. This scenario (the one we are in now) also plays into the question, "why do inverted yield curves predict recessions?" It makes sense why when you follow the underlying financial workings that occur in a rising rate environment. https://www.investopedia.com/articles/fundamental-analysis/09/intermarket-relations.asp

kippypapa

It does. The risk free rate is included in all WACC and DCF analyses.

takeoff_power_set

does WACC affect microsoft in exactly the same way as it affects google, or coke, or united airlines? if not then the entire discussion is stupid

Alive-Requirement122

Divinations? Do you know what WACC is in valuation?

sd2701

thats WACC

Jeff__Skilling

Uh....dude, why are you using about 1/3 of the total interest bearing debt in your WACC calculation? You're showing ~$1.3bn and a quick look at their most recent 10-Q shows [$3.8bn](https://www.sec.gov/ix?doc=/Archives/edgar/data/0000891103/000089110323000047/mtch-20230331.htm)....and that's before looking at any LT cap lease balances...... Dumped MTCH's inputs into Factset's WACC calculator [and I got a much lower cost of capital than you did....](https://imgur.com/a/eisq51h)

Hanzoisbad

A 9% WACC yielded about $72/share. I think what could've been done to mitigate this uncertainty in beta here is to do a sensitivity analysis to determine a more realistic value.

Timo_TMK

I think it would be a good idea to run this with a few more realistic betas. If yahoo doesn’t have enough historical data, maybe check the beta of comparable companies that have a longer history. The WACC had such a huge impact on the final value, I think you should play around with different in your model to see how it impacts your target share price

Sumif

I have been watching Duolingo for a while, but I haven't pulled the trigger. For decades, Rosetta Stone was synonymous with language, and I think that Duolingo has taken it's place. I'd like to see what price you come up with given a WACC of 11.5%. I can't recall where, but I was reading an article about it a month or so ago and the author posited a WACC of 11%. I think some folks worry that AI will take away the need for Duolingo. Not only do I disagree, I'd argue that Duolingo with continue to implement AI to expand it's services. 1) There is an immense amount of liability for a company to publish something in multiple languages. Duolingo needs to create a commercial service in which a company uploads a notice/letter/etc and Duolingo will translate it. 2) in their recent earnings call, they talked about "One was called Roleplay, which allowed users to practice conversation;". That is HUGE. And this will become even more impressive as audio AI improves. You'll be able to practice a full conversation with the app, and it'll feel very real. I learned Spanish and am fluent, and the hardest part is going from the learning/memorization format to the conversational part. If they can give you a Practice Partner in your Pocket, it'll be a game changer.

Timo_TMK

I didn’t read the whole post, although I bet it’s great I have one comment on the WACC. It’s way too low, just from a sanity check POV, 5.7% is not realistic, and looking at the price movement, the beta of 0.3 is almost impossible, where did you find it? Looks like a >1 beta stock for sure. WACC is >10% realistically, and I didn’t do the calculation but I bet that would heavily pull down the valuation! What do you think?

Asnoofmucho

The weighted average cost of capital (WACC). It is the sum of weighted components of a company/project financing. Comprised of cost of equity(E/D+E) + after tax cost of debt (D/D+E) Cost of equity using Capital asset pricing model = Risk free Rate (return on a real risk free asset e.g. 10yr us govt bond) + Beta × equity risk premium (ERP) Beta adjusted for leverage incorporates sector risk of a specific type of business as well as risk from leverage in a company. Regression Volatility of returns vs market over time. Also correlated with operating leverage of sectors. Some sectors like tech tend to have higher Betas than utilities for e.g. ERP= premium over RFR that you require as a marginal investor in a business operating in a certain country or region. E.g. expect greater premium from a higher risk investment in Congo vs US. Cost of debt = RFR+ CDS spread or ratings spread of a company or project × (1-t) e.g. rfr + spread of a BBB+ rated company might be 4%+5% × (1-30%) assuming a marginal tax rate of 30%. Hope this helps.

asking-money-qns

> The WACC calculation is appropriate for a public corporation that raises money through traditional channels like selling stock or securing loans - it doesn't make sense for a VC-funded startup with $10m in the bank

SufferingPhD

Yes! In my original comment, I wasn't as clear as I should have been! The WACC is what you are calculating when you calculate the cost of debt and equity and average them. I said "shareholder equity" in my original comment. Wikipedia says "equity." They are the same thing. Once you have WACC, you plug that into r in the original formula! The CAPM model relates to how to calculate the cost of equity.

asking-money-qns

I'm basing this on how \_actual CFO's\_ make decisions for \_actual real world companies\_, not cookie cutter theory in 101 textbooks. The WACC calculation is appropriate for a public corporation that raises money through traditional channels like selling stock or securing loans - it doesn't make sense for a VC-funded startup with $10m in the bank. And more crucially: \_The OP is not asking about WACC. They are asking about the definition of the concept of cost of capital. This digression is not helpful.\_

soir17

>Ok, so last question, what is the cost of shareholder equity? This is where it gets annoying. > >There are many ways to do this, but I'll give a simple one. You need some way of quantifying how risky this business is. The simplest way of doing this is using the CAPM model, where you define the risk of a business as how sensitive it is to market fluctuations. Once cost of debt and cost of equity have been determined, their blend, the weighted average cost of capital (WACC), can be calculated. This WACC can then be used as a discount rate for a project's projected free cash flows to the firm. "from WIKIPEDIA". do you mean that?

EveryPassage

This is just so false. What are you basing this on? This is corporate finance 101. WACC is based on the cost of equity and debt capital which are both influenced by the risk of the company. Can you point to a single company that claims to use the short term treasury rate as their cost of capital?

Jeff__Skilling

>From what I comprehend the cost of capital can be intended as the minimun rate of return to cover the risk of the investment. Am I right? Eh.....not really, but you're on the right track. What you described is probably better understood in the corporate finance world as IRR (or even more ambiguous, "hurdle rate"). WACC is literally what the acronym stands for: the weighted average of your cost of equity and cost of debt (and other sources of capital that show up on the balance sheet that are probably too nuanced for this comments). Cost of debt: if you're a publicly traded company, (long term) bond yield represents this perfectly. Cost of equity: a bit more nebulous, but the shorthand explanation boils down to "how volatile is your recurring, periodic cash flow available to providers of equity capital, relative to other available investments" (although if you're a public company that issues a regular dividend, the yield is a good proxy and doesn't require you to do any covariance or correlation math to calc it)

TriplepeaksNL

They are the worlds leading manufacturer of advanced semiconductor manufactoring equipment. Hard to not put a big premium on that. ASML owns a large portion of their quite unique suppliers, hard to put a price on that since it is very hard to compete because it very much stenghtens ASML’s moat. Their WACC is probably lower than what you stated given their credit ratings and capital structure. I am a long term believer and shareholder, will not be reducing my position before 2030 at least, the business has plenty room to grow, also supported by a very decent long term CAGR. For me as a long term shareholder, I value their very strong moat and therefore I don’t sell at these -in my view- low price levels.

ThrownawY9292

My DCF valuation of PayPal at 20% operating margins (after R&D expense capitalisation) and 10% growth for next 5 years come at $64.40. (capitalising R&D expense over 3 years overall increased its valuation by 1$ lol). The wacc is using an implied s&p equity premium and beta using levered bottom up beta of 1.05 from consumer Financial services stocks (you can get a list of this from finviz filtering for the industry PayPal is in). Bottom line WACC approx 9.8% So paypal imo isn’t trading far below it’s worth. It’s mostly fairly priced at ~$63 unless you have valid reason to believe that growth is higher than analyst estimates or margins could be higher than 20% when competition is increasing. I did this research intending to buy at first but was not convinced. Maybe at $50

hikibi_hunter

Generally, I tend to look at sectors and countries (must have a stable currency) that aren’t hyped by retail investors (examples: consumer staples, materials, companies from Japan and Greece). As for metrics, I have a general checklist I use to screen companies: 1. 2x price growth over the last 10yrs 2. 5yr average PE<20 3. 5yr avg Net profit margin>10% 4. 5yr avg ROIC>10% 5. Assets>Liabilities 6. Shares outstanding decreasing over last 5yrs. 7. FCF-to-Long term Liabilties>20% 8.FCF>Dividends paid out 9. 5yr avg Shareholder value (ROIC/WACC)>1 10-15. Increasing: revenue, FCF, COA, gross profit, net income, & operating income over the last 5yrs. Now a company that hits none of these is not an automatic no buy, but generally that’s the case. While a 15/15 company is not an automatic buy, especially if I don’t know anything about the industry it’s in. More specifically, in the case of small caps I additionally look for: 1. FCF between 7 & 15 (necessary) 2. Be in a boring industry (necessary) 2. 2x revenue growth over the last decade (nice to have) 3. 3x revenue growth over the last decade (nice to have) 4. Either 4x EPS or Dividend growth over the last decade (nice to have) 5. Recent drop in price (nice to have) Lastly for banks, I again use the 15 checklist but also look for: 1. 10 yr average Efficiency ratio < or = 60% 2. 10 yr average Revenue-to-assets ratio >4.50% After all of this I would generally value the company using DCF (if there is stable FCF), or some other method. Then do a deep dive into the company’s reports.

-Right-Tackle-

10 year is more important IMO. It’s the risk free rate used for WACC / DCF analysis for cash flow valuations

bullsarethegoodguys

AAPL does that too lmao. Depending on your WACC it's totally legit.

Dangerous_Boot_3870

That's not how business works kiddo. When you sell equity and use the capital to expedite growth you are getting sums of money that are unfeasible to pay interest on or really need the capital without the added expense to grow. Microsoft would not be worth what it is today if he financed all of his growth through operations, interest or out of pocket. Especially in the beginning when most companies will experience the most cash flow issues. It is the access to capital, along with making sound decisions, that allowed Microsoft to be what it is today. If you want to get technical about it... Funding through equity reduced his Weighted Average Cost of Capital(WACC) allowing him to get better terms on loans/equity deals in the future. It also improved other ratios and other financial statement shenanigans. Funding through equity isn't a bad thing. It's a smart move from a business standpoint as long as the valuation is favorable and the additional gains outweigh future losses. This is what happens when people get into business and learn from Shark Tank and other reality/social media bullshit. It's entertainment. They only compete against a pool of 5 investors on the show. Ofcourse they exploit this to devalue most offers. Do you know how many investment capital firms there are in reality? If one says no you pitch to the next guy until you get what you want. It's really that simple.

stiveooo

WACC of the stock is dropping making it a buy.

BaggerVance_

What an unnecessary and utterly pointless comment to try to sound smart. WACC is an industry standard along with sensitivity analysis.

Jeff__Skilling

I means "If I were to calculate a company's share price independently, how would I do it" - which he can, and it isn't very hard * Find consensus broker estimates for a tickers next 3 - 5 years unlevered free cash flow * Select a series of peer comparable companies, calculate their NTM EV / EBITDA multiples, and pick the median. This is your terminal value multiple (alternatively, you could use perpetuity growth method to calculate TV, but generally less reliable since you're picking a random number out of the air w/r/t perpetual growth %) * Calculate WACC - use your peer comp set median beta for your WACC calc and the company in question's current yield on any publicly traded bonds with a ~10ish to ~20ish year tenor Boom, there you have it - the three things you need to calculate share price. Or, if you just plug in current market cap, you can back into WACC (or perp growth rate / TV mult, if you want)

Jeff__Skilling

I'm pretty shocked I had to scroll down this far to find the correct answer..... Waaaaaay too many posters in here posting misinformation like "You can't calculate stock price, it's just what the most recent settlement data happens to be" when, as long as you know consensus estimates on forward unlevered free cash flow, WACC, and a terminal value multiple to back into total equity value (or use market data from the most recent close date for equity value and solve for one of the other variables, generally WACC)

Andrige3

I've often thought about altering ratio of stocks/treasuries based on the prevailing interest rate. As interest rates rise, stocks become riskier (due to increased WACC) and the opportunity cost of treasuries becomes lower. However, I haven't seen any research papers backtesting this strategy.

Forward_Contract_378

Equity is more expensive than debt. While de risking the firm, they are increasing their WACC, indicating it will theoretically need to pursue more aggressive growth projects that are higher risk. All the while, I can’t imagine this business to be easily scalable. Brick and mortar, second hand items store…give me a break. How can they aggressively grow to compensate their equity holders when their business model is predicated on opening up physical shops and procuring low quality merchandise from individuals who, by the way, may think the Salvation Army or Goodwill are the only second hand stores? Would think very carefully before buying into this unless you’re only planning to gamble in the first 6 months. Don’t know what the lockup period for the PE firm is like, but I bet you they dump some shares once they’re able to.

wearahat03

The how to analyze is 50% wrong. Profit margin should be compared to industry average. Assets doesn’t mean good. Companies that can generate profits with fewer assets are better than ones heavy in PPE. Likewise companies like googl with consistently 100bn+ cash is bad, means they don’t know how to deploy cash or return it. People dont invest in companies for them to hold cash. Return on assets obviously goes up when assets goes down. Debt does increase risk but carrying debt can be good as it can lower WACC and boost ROE. Capex is not good, just necessary for some companies. Revenue growth can be seen from income statement you do not infer growth from capex. Mastercard grew double digits for over a decade on very little capex which is the ideal target for every company. Also contradicts the earlier point about expenses increasing is bad. Capex is an expense

Alternative_Disk_319

I understand what your saying with QT/hikes being a factor in SVB’s and other regional firms collapse, but I believe their bond portfolios were just not properly risk-adjusted. I always am cautious when I try to attribute one variable for determining market direction. QT is important to be aware of because it increases long term borrowing and subsequently increasing WACC. However, even if QT and hikes continue there is still a possibility companies have readjusted for more costly expansion. I agree with you that markets will probably continue an upward trend, but I believe this will still happened even with QT or hikes. There is a possibility for a slight slowdown but the job market is still very strong (aka it’s not 1929). Also tbh right now 4 percent inflation yoy isn’t that bad.

ExplorerCommercial49

What is the significance of ROIC WACC?

fromcjoe123

"How did you get such a cheap WACC when you're forecasting extreme growth and rates are the highest they've been in over a decade" "Science......we did the numbers you see"

fromcjoe123

If tech companies were really valued off discounting future cash flows, San Francisco would have been sucked back into the sea by Poseidon for its arrogance, and the entire sector would have died 20 years ago. No - valuations are based on 1) unicorn farts (stupidly bloated comps), 2) Soon™ TAM analysis, 3) the belief that somehow marginal revenue shouldn't have margin cost....... eventually, 4) a complete disregard for cash generation and infinite non-dilutive equity funding cus we decided we're not having a recession after all. Tech has been a casino for 25 years. Just buy some ETF exposure and let that this go up. Because nobody actually knows how this shit trades but we as a society assumes it will collectively we worth a lot more tomorrow regardless of cash flow, so it goes up Is Palantir undervalued? Fuck it maybe. But a DCF under pinned by "who the fuck knows" for your FCF forecast, terminal assumptions, and WACC is exactly why every M&A pitch deck in the sector traditionally is just gonna box the forward revenue multiples on trading comps and disregard the rest of the football field since it's all fucking guess work for the sake of completeness lol.