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2021-12-23

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An Intrinsic Calculation For Sea Limited (NYSE:SE) Suggests It's 38% Undervalued

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Sea

An Intrinsic Calculation For Sea Limited (NYSE:SE) Suggests It's 38% Undervalued

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Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.</p>\n<p>Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, theSimply Wall St analysis model heremay be something of interest to you.</p>\n<p>The method</p>\n<p>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.</p>\n<p>A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:<img src=\"https://static.tigerbbs.com/900a00b739c53cb9c592a1ff4cb5eaff\" tg-width=\"614\" tg-height=\"239\" width=\"100%\" height=\"auto\">(\"Est\" = FCF growth rate estimated by Simply Wall St)</p>\n<p><b>Present Value of 10-year Cash Flow (PVCF)</b>= US$46b</p>\n<p>After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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%.</p>\n<p><b>Terminal Value (TV)</b>= FCF2031× (1 + g) ÷ (r – g) = US$13b× (1 + 2.0%) ÷ (6.3%– 2.0%) = US$293b</p>\n<p><b>Present Value of Terminal Value (PVTV)</b>= TV / (1 + r)10= US$293b÷ ( 1 + 6.3%)10= US$159b</p>\n<p>The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$204b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$228, the company appears quite good value at a 38% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.</p>\n<p><img src=\"https://static.tigerbbs.com/d031f94f7285b2dd74b50be13b78ca2d\" tg-width=\"853\" tg-height=\"380\" width=\"100%\" height=\"auto\">The assumptions</p>\n<p>The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Sea as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.3%, which is based on a levered beta of 1.000. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.</p>\n<p>Looking Ahead:</p>\n<p>Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For Sea, we've compiled three further items you should assess:</p>\n<ol>\n <li><b>Risks</b>: To that end, you should be aware of the<b>2 warning signs</b>&nbsp;we've spotted with Sea.</li>\n <li><b>Future Earnings</b>: How does SE's growth rate compare to its peers and the wider market?</li>\n <li><b>Other High Quality Alternatives</b>: Do you like a good all-rounder?</li>\n</ol>","source":"lsy1603171495471","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>An Intrinsic Calculation For Sea Limited (NYSE:SE) Suggests It's 38% Undervalued</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nAn Intrinsic Calculation For Sea Limited (NYSE:SE) Suggests It's 38% Undervalued\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-12-23 11:17 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://www.nasdaq.com/articles/an-intrinsic-calculation-for-sea-limited-nyse%3Ase-suggests-its-38-undervalued><strong>Nasdaq</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Sea Limited (NYSE:SE) as an investment opportunity by projecting its future cash flows and then ...</p>\n\n<a href=\"https://www.nasdaq.com/articles/an-intrinsic-calculation-for-sea-limited-nyse%3Ase-suggests-its-38-undervalued\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"SE":"Sea Ltd"},"source_url":"https://www.nasdaq.com/articles/an-intrinsic-calculation-for-sea-limited-nyse%3Ase-suggests-its-38-undervalued","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1151093531","content_text":"Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Sea Limited (NYSE:SE) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.\nCompanies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, theSimply Wall St analysis model heremay be something of interest to you.\nThe method\nWe'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.\nA DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:(\"Est\" = FCF growth rate estimated by Simply Wall St)\nPresent Value of 10-year Cash Flow (PVCF)= US$46b\nAfter calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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%.\nTerminal Value (TV)= FCF2031× (1 + g) ÷ (r – g) = US$13b× (1 + 2.0%) ÷ (6.3%– 2.0%) = US$293b\nPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= US$293b÷ ( 1 + 6.3%)10= US$159b\nThe total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$204b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$228, the company appears quite good value at a 38% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.\nThe assumptions\nThe calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Sea as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.3%, which is based on a levered beta of 1.000. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.\nLooking Ahead:\nWhilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For Sea, we've compiled three further items you should assess:\n\nRisks: To that end, you should be aware of the2 warning signs we've spotted with Sea.\nFuture Earnings: How does SE's growth rate compare to its peers and the wider market?\nOther High Quality Alternatives: Do you like a good all-rounder?","news_type":1},"isVote":1,"tweetType":1,"viewCount":796,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":["HOPE"],"verified":2,"subType":0,"readableState":1,"langContent":"CN","currentLanguage":"CN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":11,"xxTargetLangEnum":"ZH_CN"},"commentList":[],"hasMoreComment":false,"orderType":2}