• Wondering if Goosehead Insurance at around US$40 still has more downside risk than upside potential, or if the recent weakness is starting to create value?
• The stock has been under pressure, with the share price down 3.2% over the past week, 17.1% over the past month and 63.8% over the past year.
• Recent coverage has focused on the stock’s extended share price weakness and what this means for investors who bought at higher levels, along with renewed interest from investors who are starting to reassess the risk and reward trade off at a lower price. Commentary has also highlighted that the company’s long term share price record, including 3 year and 5 year returns, has been negative and is an important part of the current discussion around value.
• Simply Wall St’s valuation model currently gives Goosehead Insurance a value score of 2 out of 6. This article will compare different valuation approaches and then finish with a framework that can help you interpret those numbers in a more complete way.

Goosehead Insurance scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Goosehead Insurance Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model takes estimates of a company’s future cash flows and discounts them back to today using a required rate of return, to arrive at an estimate of what the stock could be worth right now.

For Goosehead Insurance, Simply Wall St applies a 2 Stage Free Cash Flow to Equity model using free cash flow in $ as the starting point. The latest twelve month free cash flow is about $75.70 million. Analysts provide explicit forecasts for the next few years, and Simply Wall St then extrapolates further, which leads to a projected free cash flow of about $116.92 million in 2035 based on the supplied ten year path.

On this basis, the model estimates an intrinsic value of about $66.13 per share. Compared with the current share price of around $40, the implied discount of 39.5% indicates that the stock appears undervalued according to this DCF view.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Goosehead Insurance is undervalued by 39.5%. Track this in your watchlist or portfolio, or discover 46 more high quality undervalued stocks.

Approach 2: Goosehead Insurance Price vs Earnings

For profitable companies, the P/E ratio is a useful way to think about what you are paying for each dollar of current earnings. Higher growth expectations and lower perceived risk usually justify a higher P/E, while slower growth or higher risk tend to pull a fair P/E lower.

Goosehead Insurance currently trades on a P/E of 31.17x. That is above both the Insurance industry average of 11.29x and the peer group average of 26.15x, so on simple comparisons the stock looks expensive.

Simply Wall St’s Fair Ratio metric estimates what a more tailored P/E might look like for Goosehead Insurance, at 17.41x. This Fair Ratio is based on factors such as earnings growth, industry, profit margins, market cap and specific risk characteristics, which makes it more nuanced than just lining the stock up against broad industry or peer averages.

Comparing the current P/E of 31.17x with the Fair Ratio of 17.41x suggests Goosehead Insurance is trading above the level that would typically be implied by those fundamentals, so on this measure the stock screens as overvalued.

Result: OVERVALUED

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Upgrade Your Decision Making: Choose your Goosehead Insurance Narrative

Earlier the article mentioned that there is an even better way to understand valuation, so this is where Narratives come in, giving you a simple story behind the numbers by linking your view on Goosehead Insurance’s revenue, earnings and margins to a specific fair value and then comparing that to today’s price.

On Simply Wall St’s Community page, Narratives are an easy tool that millions of investors use to set out their own story for a company, connect that story to a forecast, and see the implied fair value update automatically when fresh information such as news, buyback activity or earnings guidance is added.

For Goosehead Insurance, one investor might align with the more optimistic view that supports a Fair Value around US$98.13, based on assumptions like revenue growth of 21.88%, a profit margin of 8.82% and a future P/E of 37.53x. Another investor might lean toward the more cautious end with Fair Value closer to US$52.10, using different assumptions such as 18.23% revenue growth, a 12.00% margin and a future P/E of 38.47x. These two Narratives lead to very different conclusions when each fair value is compared with the current share price.

Do you think there's more to the story for Goosehead Insurance? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.