Couchbase, Inc. (NASDAQ:BASE) shares could be 29% below their estimated intrinsic value

Key findings

• Couchbase’s estimated fair value is $25.28 based on 2-step free cash flow to equity

• Couchbase is estimated to be undervalued by 29% based on the current share price of $18.06.

• The analyst price target of $27.23 for BASE is 7.7% above our fair value estimate

How far is Couchbase, Inc. (NASDAQ:BASE) from its intrinsic value? Using the most recent financial data, we will check whether the stock is fairly valued. To do this, we take the company’s projected future cash flows and discount them to today’s value. To do this, we use the Discounted Cash Flow (DCF) model. Models like this may seem incomprehensible to a layperson, but they are relatively easy to follow.

We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without its flaws. Anyone interested in learning more about intrinsic value should check out Simply Wall St’s analysis model.

Check out our latest analysis for Couchbase

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 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 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 need to discount the sum of these future cash flows to arrive at an estimate of present value:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 277 million US dollars

The story goes on

The second phase is also called the terminal value, which is the company’s cash flow after the first phase. 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 7.3%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = $97 million × (1 + 2.4%) ÷ (7.3% – 2.4%) = $2.0 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= $2.0 billion ÷ (1 + 7.3%)¹⁰= 995 million US dollars

Total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total value of equity, which in this case is $1.3 billion. To get the intrinsic value per share, we divide that by the total number of shares outstanding. Relative to the current share price of $18.1, the company appears somewhat undervalued at a 29% discount to the current share price. However, keep in mind that this is only an approximate valuation and as with any complex formula, where there’s garbage in, there’s garbage out.

The assumptions

We would like to point out that the key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and check your own assumptions. DCF also does not take into account the potential cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we consider Couchbase 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 7.3%, which is based on a leveraged beta of 1.073. 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 Couchbase

Strength

weakness

Opportunity

Danger

Next Steps:

Valuation is only one side of the coin when developing your investment thesis and ideally shouldn’t be the only analysis you look at for a company. The DCF model is not a perfect tool for stock valuation. Instead, a DCF model is best used to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. For example, slightly adjusting the terminal value growth rate can dramatically change the overall result. Can we find out why the company is trading at a discount to intrinsic value? For Couchbase, we’ve compiled three other aspects for you to consider:

1. Risks: Note that Couchbase displays 2 warning signals in our investment analysis you should know about…

2. Future income: How is BASE’s growth rate comparing to competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.

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. Simply Wall St updates its DCF calculation for every American stock daily, so if you want to find out the intrinsic value of another stock, just search here.

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This Simply Wall St article is of a general nature. We comment based 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.

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