Key Insights

• The projected honest worth for Seagate Technology Holdings is US$70.47 based mostly on 2 Stage Free Cash Flow to Equity

• Current share worth of US$93.05 suggests Seagate Technology Holdings is probably 32% overvalued

• The US$91.76 analyst price target for STX is 30% greater than our estimate of honest worth

How far off is Seagate Technology Holdings plc (NASDAQ:STX) from its intrinsic worth? Using the newest monetary information, we’ll check out whether or not the inventory is pretty priced by taking the anticipated future money flows and discounting them to their current worth. Our evaluation will make use of the Discounted Cash Flow (DCF) mannequin. Believe it or not, it is not too troublesome to comply with, as you may see from our instance!

Companies will be valued in a number of methods, so we might level out {that a} DCF is just not excellent for each state of affairs. For those that are eager learners of fairness evaluation, the Simply Wall St analysis model here could also be one thing of curiosity to you.

See our latest analysis for Seagate Technology Holdings

Crunching The Numbers

We use what is called a 2-stage mannequin, which merely means we’ve got two totally different intervals of progress charges for the corporate’s money flows. Generally the primary stage is greater progress, and the second stage is a decrease progress part. In the primary stage we have to estimate the money flows to the enterprise over the subsequent ten years. Where doable we use analyst estimates, however when these aren’t accessible we extrapolate the earlier free money circulate (FCF) from the final estimate or reported worth. We assume firms with shrinking free money circulate will gradual their charge of shrinkage, and that firms with rising free money circulate will see their progress charge gradual, over this era. We do that to mirror that progress tends to gradual extra within the early years than it does in later years.

A DCF is all about the concept a greenback sooner or later is much less invaluable than a greenback at this time, so we low cost the worth of those future money flows to their estimated worth in at this time’s {dollars}:

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10-year free money circulate (FCF) forecast

(“Est” = FCF progress charge estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$7.1b

We now must calculate the Terminal Value, which accounts for all the long run money flows after this ten 12 months interval. The Gordon Growth formulation is used to calculate Terminal Value at a future annual progress charge equal to the 5-year common of the 10-year authorities bond yield of two.3%. We low cost the terminal money flows to at this time’s worth at a price of fairness of 9.8%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$1.4b× (1 + 2.3%) ÷ (9.8%– 2.3%) = US$20b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$20b÷ ( 1 + 9.8%)¹⁰= US$7.7b

The whole worth is the sum of money flows for the subsequent ten years plus the discounted terminal worth, which ends up in the Total Equity Value, which on this case is US$15b. In the ultimate step we divide the fairness worth by the variety of shares excellent. Compared to the present share worth of US$93.1, the corporate seems probably overvalued on the time of writing. The assumptions in any calculation have a big effect on the valuation, so it’s higher to view this as a tough estimate, not exact right down to the final cent.

Important Assumptions

The calculation above could be very depending on two assumptions. The first is the low cost charge and the opposite is the money flows. You do not must agree with these inputs, I like to recommend redoing the calculations your self and enjoying with them. The DCF additionally doesn’t take into account the doable cyclicality of an business, or an organization’s future capital necessities, so it doesn’t give a full image of an organization’s potential efficiency. Given that we’re Seagate Technology Holdings as potential shareholders, the price of fairness is used because the low cost charge, slightly than the price of capital (or weighted common price of capital, WACC) which accounts for debt. In this calculation we have used 9.8%, which relies on a levered beta of 1.376. Beta is a measure of a inventory’s volatility, in comparison with the market as a complete. We get our beta from the business common beta of worldwide comparable firms, with an imposed restrict between 0.8 and a couple of.0, which is an inexpensive vary for a secure enterprise.

SWOT Analysis for Seagate Technology Holdings

Strength

Weakness

Opportunity

Threat

Looking Ahead:

Valuation is just one aspect of the coin when it comes to constructing your funding thesis, and it should not be the one metric you have a look at when researching an organization. DCF fashions aren’t the be-all and end-all of funding valuation. Instead the perfect use for a DCF mannequin is to check sure assumptions and theories to see if they’d result in the corporate being undervalued or overvalued. For occasion, if the terminal worth progress charge is adjusted barely, it may dramatically alter the general outcome. Why is the intrinsic worth decrease than the present share worth? For Seagate Technology Holdings, we have compiled three pertinent parts it’s best to take into account:

1. Risks: For instance, we have found 3 warning signs for Seagate Technology Holdings that you ought to be conscious of earlier than investing right here.

2. Future Earnings: How does STX’s progress charge evaluate to its friends and the broader market? Dig deeper into the analyst consensus quantity for the upcoming years by interacting with our free analyst growth expectation chart.

3. Other High Quality Alternatives: Do you want an excellent all-rounder? Explore our interactive list of high quality stocks to get an concept of what else is on the market you could be lacking!

PS. Simply Wall St updates its DCF calculation for each American inventory every single day, so if you wish to discover the intrinsic worth of every other inventory simply search here.

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This article by Simply Wall St is normal in nature. We present commentary based mostly on historic information and analyst forecasts solely utilizing an unbiased methodology and our articles aren’t meant to be monetary recommendation. It doesn’t represent a advice to purchase or promote any inventory, and doesn’t take account of your goals, or your monetary state of affairs. We purpose to deliver you long-term centered evaluation pushed by basic information. Note that our evaluation could not issue within the newest price-sensitive firm bulletins or qualitative materials. Simply Wall St has no place in any shares talked about.