Tandem Diabetes Care, Inc. (NASDAQ:TNDM) is potentially undervalued by 35%, according to an estimate of its fair value by Simply Wall St. The estimated fair value of the company is $29.80 per share, while the current share price is $19.50. Analysts have set a price target of $40.07, which is 34% higher than the estimated fair value.
To determine the intrinsic value of Tandem Diabetes Care, we will use the Discounted Cash Flow (DCF) model. This model calculates the present value of a company’s future cash flows. The DCF model takes into account two stages of growth: a higher growth period followed by a steady growth period.
In the first stage, we estimate the cash flows to the business over the next ten years. We use analyst estimates when available, but we also extrapolate previous free cash flow if necessary. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, and companies with growing free cash flow will see their growth rate slow over time.
To arrive at a present value estimate, we discount the sum of these future cash flows. We assume that a dollar today is more valuable than a dollar in the future. Using a discount rate of 7.3%, we calculate the present value of the 10-year cash flow forecast to be $361 million.
The next step is to calculate the Terminal Value, which accounts for all future cash flows after the ten-year period. We use a very conservative growth rate that cannot exceed the country’s GDP growth rate. In this case, we use the 5-year average of the 10-year government bond yield (2.2%) as the growth rate. The Present Value of the Terminal Value is estimated to be $1.6 billion.
The total equity value is then the sum of the present value of the future cash flows and the present value of the terminal value, which amounts to $1.9 billion. Finally, dividing this value by the number of shares outstanding, we find that the company is undervalued by approximately 35%.
It is important to note that this valuation is just an approximation and there are other factors to consider. The discount rate and actual cash flows are critical inputs to the DCF model. Additionally, the model does not account for industry cyclicality or a company’s future capital requirements.
In conclusion, while the DCF model suggests that Tandem Diabetes Care is undervalued, it is recommended to consider other metrics and assumptions in addition to the valuation. Conducting further analysis and examining different scenarios will provide a more comprehensive understanding of the company’s potential performance.
Source: Simply Wall St
Definitions:
– Intrinsic value: The actual value of a company’s stock, determined through fundamental analysis and calculated using methods like the DCF model.
– Discounted Cash Flow (DCF) model: A valuation method that calculates the present value of a company based on its future cash flows.
– Terminal Value: The value of a company’s future cash flows beyond a specified time period. It is estimated by assuming a conservative growth rate.
– Discount rate: The rate used to discount future cash flows to their present value, taking into account the time value of money.
– Free cash flow (FCF): The cash generated by a company after accounting for operating expenses and capital expenditures. It represents the cash available to be distributed to investors.
– Present value: The value of an expected income or cash flow in today’s dollars, after discounting it based on the time value of money.
SWOT Analysis for Tandem Diabetes Care:
– Strengths: The company has more cash than total debt.
– Weakness: No major weaknesses identified.
– Opportunities: It is forecasted to reduce losses next year and has sufficient cash runway for more than 3 years. It is considered to have good value based on the P/S ratio and estimated fair value.
– Threats: Debt is not well covered by operating cash flow, and profitability is not expected in the next 3 years.
Source: Simply Wall St