Amplitude, Inc. (NASDAQ:AMPL)’s intrinsic value may be 74% above its share price

Key findings

• Amplitude’s estimated fair value is $15.08 based on 2-step free cash flow to equity
• Amplitude’s share price of $8.68 suggests the company may be undervalued by 42%
• Our fair value estimate is 33% above Amplitude’s analyst price target of $11.31.

In this article, we will estimate the intrinsic value of Amplitude, Inc. (NASDAQ:AMPL) by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will use to do this. Before you think you can’t understand it, just keep reading! It’s actually a lot less complex than you think.

Companies can be valued in many ways, so we would like to point out that a DCF is not perfect for every situation. If you want to learn more about intrinsic value, you should take a look at Simply Wall St’s analysis model.

Check out our latest analysis for Amplitude

The model

We use the 2-stage growth model, which simply means that we consider two stages of company 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 estimate the next ten years’ worth 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 down 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) = 487 million US dollars

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 6.9%.

Final value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = 117 million US dollars × (1 + 2.4%) ÷ (6.9% – 2.4%) = 2.6 billion US dollars

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 2.6 billion US dollars ÷ (1 + 6.9%)¹⁰= 1.4 billion US dollars

Total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total equity value, which in this case is $1.8 billion. In the final step, we divide the equity value by the number of shares outstanding. Relative to the current share price of $8.7, the company appears quite undervalued at a 42% 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.

Important assumptions

The main 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 around with them. The DCF also doesn’t take into account the potential 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 consider Amplitude 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 6.9%, which is based on a leveraged beta of 0.984. 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 Amplitude

Looking ahead:

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. DCF models are not the be-all and end-all of investment valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect valuation. Why is intrinsic value higher than the current share price? For Amplitude, we’ve compiled three essential elements for you to examine:

1. Risks: For example, we found 2 Warning signals for amplitude that you should know before investing here.
2. Future income: How does AMPL’s growth rate compare 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 solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

PS The Simply Wall St app runs a discounted cash flow valuation for every stock on the NASDAQCM 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 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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