An intrinsic calculation for DoorDash, Inc. (NASDAQ:DASH) suggests that the company is undervalued by 43%

Key findings

• DoorDash’s estimated fair value is $185 based on 2-step free cash flow to equity

• DoorDash is estimated to be 43% undervalued based on its current share price of $105.

• Our fair value estimate is 38% above DoorDash’s analyst price target of $134.

Today we’ll go over one way to estimate the intrinsic value of DoorDash, Inc. (NASDAQ:DASH) by estimating the company’s future cash flows and discounting them to their present value. To do this, we’ll use the Discounted Cash Flow (DCF) model. Don’t be put off by the technical jargon, the math behind it is actually quite simple.

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one of them. For those who enjoy stock analysis, the analysis model presented here by Simply Wall St might be of interest.

Check out our latest analysis for DoorDash

What is the estimated value?

We use the two-stage growth model, which simply means that we consider two stages of the company’s growth. In the early stage, the company might have a higher growth rate, and in the second stage, a stable growth rate is usually assumed. First, we need to get estimates of the next ten years of cash flows. Where possible, we use analyst estimates, but when these are not 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, the sum of these future cash flows is discounted to today’s 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) = 25 billion US dollars

The story goes on

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 7.4%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = $5.1 billion × (1 + 2.4%) ÷ (7.4% – 2.4%) = $104 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 104 billion US dollars ÷ ( 1 + 7.4 %)¹⁰= 51 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 $76 billion. In the final step, we divide the equity value by the number of shares outstanding. Relative to the current share price of $105, the company appears quite valuable at a 43% discount to the current share price. However, valuations are imprecise instruments, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.

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. 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, so it doesn’t provide a complete picture of a company’s potential performance. Since we consider DoorDash 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 7.4%, which is based on a leveraged beta of 1.088. 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 DoorDash

Strength

weakness

Opportunity

Danger

Next Steps:

Valuation is only one side of the coin when building your investment thesis and should not be the only metric you consider when researching a company. The DCF model is not a perfect tool for stock valuation. It should be viewed more as a guide to “what assumptions need to hold for this stock to be under/overvalued.” If a company grows at a different rate, or if its cost of equity or risk-free rate changes significantly, the outcome can look very different. Why is the intrinsic value higher than the current share price? For DoorDash, we’ve compiled three key factors you should examine in more detail:

1. Risks: Take risks, for example – DoorDash has 2 warning signs In our opinion, you should be aware of this.

2. Future income: How is DASH’s growth rate compared 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: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get an idea 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 NASDAQGS every day. If you want to find the calculation for other stocks, just search here.

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This Simply Wall St article is of a general nature. We comment solely on the basis of 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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