Calculating the intrinsic value of HubSpot, Inc. (NYSE:HUBS)

Key findings

• HubSpot’s estimated fair value is $601 based on 2-step free cash flow to equity

• With a share price of $584, HubSpot appears to be trading close to its estimated fair value

• The analyst price target of $672 for HUBS is 12% above our fair value estimate

How far is HubSpot, Inc. (NYSE:HUBS) from its intrinsic value? Using the most recent financial data, we will check whether the stock is fairly valued by projecting its future cash flows and then discounting them to today’s value. This is done using the Discounted Cash Flow (DCF) model. Models like this may seem incomprehensible to a layperson, but they are relatively easy to follow.

We would like to point out that there are many ways to value a company and that each method, like the DCF, has advantages and disadvantages in certain scenarios. If you still have questions about this type of valuation, take a look at Simply Wall St’s analysis model.

Check out our latest analysis for HubSpot

Step by step through the calculation

We use what is called a 2-stage model, which simply means that we have two different growth periods for the company’s cash flows. Generally speaking, the first stage is one of higher growth, and the second stage is one of lower growth. First, we need to get estimates for 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 that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate, over this period. We do this to take into account that growth tends to slow more in the early years than in later years.

In general, we assume that a dollar today is worth more than a dollar in the future. Therefore, we discount the value of these future cash flows to their estimated value in today’s dollars:

The story goes on

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 8.6 billion US dollars

We now need to calculate the terminal value that takes into account all future cash flows after this ten-year period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 2.4%. We discount the terminal cash flows to today’s value at a cost of equity of 7.0%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = 1.9 billion US dollars × (1 + 2.4%) ÷ (7.0% – 2.4%) = 43 billion US dollars

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 43 billion US dollars ÷ (1 + 7.0%)¹⁰= 22 billion US dollars

The total value or equity value is then the sum of the present value of future cash flows, which in this case is $31 billion. In the final step, we divide the equity value by the number of shares outstanding. Compared to the current share price of $584, the company appears roughly fairly valued, at a 2.9% discount to the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s better to consider this a rough estimate that isn’t accurate to the last cent.

The assumptions

The above calculation relies heavily 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 repeating the calculations yourself and playing with them. The DCF also doesn’t take into account the possible cyclicality of an industry or a company’s future capital needs and therefore doesn’t provide a complete picture of a company’s potential performance. Since we’re looking at HubSpot 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 takes debt into account. In this calculation, we used 7.0%, which is based on a leveraged beta of 0.995. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for HubSpot

Strength

weakness

Opportunity

Danger

Go on:

Valuation is only one side of the coin when building your investment thesis and just one of many factors you need to evaluate for a company. DCF models are not the be-all and end-all of investment valuation. The best thing to do is apply different cases and assumptions and see how they affect the company’s valuation. If a company grows differently or its cost of equity or risk-free rate changes significantly, the outcome could be very different. For HubSpot, there are three key aspects to consider:

1. Risks: Note that HubSpot displays 1 warning signal in our investment analysis you should know about…

2. management:Have insiders increased their shares to capitalize on market sentiment regarding HUBS’s future prospects? Read our management and board analysis with insights into CEO compensation and governance factors.

3. Other high-quality alternatives: Like a good all-rounder? Explore our interactive list of high-quality stocks to get a sense of what else you might be missing out on!

PS The Simply Wall St app runs a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, just search here.

Do you have feedback on this article? Are you concerned about the content? Get in touch directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We comment solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

Do you have feedback on this article? Are you interested in the content? Contact us directly. Alternatively, send an email to [email protected]