Calculating the fair value of Semrush Holdings, Inc. (NYSE:SEMR)

How far is Semrush Holdings, Inc. (NYSE:SEMR) from its intrinsic value? Using the most recent financial data, we will check if the stock is fairly valued by estimating the company’s future cash flows and discounting them to their present value. This is done using the Discounted Cash Flow (DCF) model. There’s actually not too much to it, even though it may seem quite complex.

Companies can be valued in many ways, so we want to point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, you can read the basics of this calculation in detail in Simply Wall St’s analysis model.

Check out our latest analysis for Semrush Holdings

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.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today. 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) = 447 million US dollars

After calculating the present value of future cash flows in the first 10-year period, we need to calculate the terminal value that takes into account all future cash flows after the first 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 1.9%. We discount the terminal cash flows to today’s value at a cost of equity of 6.2%.

Final value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = 113 million US dollars × (1 + 1.9%) ÷ (6.2% – 1.9%) = 2.7 billion US dollars

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 2.7 billion US dollars ÷ (1 + 6.2%)¹⁰= 1.5 billion US dollars

The 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 $1.9 billion. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of $14.3, the company seems about fair at the time of writing. 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 penny.

The assumptions

We would like to point out that the main inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you disagree with these results, try the calculation yourself and play with the assumptions. DCF also does not take into account the possible 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 Semrush Holdings 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 6.2%, which is based on a leveraged beta of 0.996. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of global peers with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

Next Steps:

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. The DCF model is not a perfect tool for stock valuation. It’s best to 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 may look very different. For Semrush Holdings, there are three other aspects you should consider:

1. Risks: For example, we found 2 warning signs for Semrush Holdings that you should know before investing here.

2. management:Have insiders increased their shares to capitalize on market sentiment regarding SEMR’s future prospects? Check out 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. 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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