A Look At The Intrinsic Value Of Airgain, Inc. (NASDAQ:AIRG)

Airgain, Inc. -1.24%

Airgain, Inc.

AIRG

5.11

-1.24%

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Airgain fair value estimate is US$4.33
  • With US$3.91 share price, Airgain appears to be trading close to its estimated fair value
  • The US$5.67 analyst price target for AIRG is 31% more than our estimate of fair value

Today we will run through one way of estimating the intrinsic value of Airgain, Inc. (NASDAQ:AIRG) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Airgain

The Model

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF ($, Millions) US$693.4k US$1.07m US$1.49m US$1.91m US$2.30m US$2.64m US$2.94m US$3.19m US$3.39m US$3.57m
Growth Rate Estimate Source Est @ 77.52% Est @ 54.93% Est @ 39.12% Est @ 28.05% Est @ 20.30% Est @ 14.88% Est @ 11.08% Est @ 8.42% Est @ 6.56% Est @ 5.26%
Present Value ($, Millions) Discounted @ 7.8% US$0.6 US$0.9 US$1.2 US$1.4 US$1.6 US$1.7 US$1.7 US$1.7 US$1.7 US$1.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$14m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 7.8%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$3.6m× (1 + 2.2%) ÷ (7.8%– 2.2%) = US$65m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$65m÷ ( 1 + 7.8%)10= US$31m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$45m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$3.9, the company appears about fair value at a 9.8% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
NasdaqCM:AIRG Discounted Cash Flow January 30th 2024

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Airgain 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 accounts for debt. In this calculation we've used 7.8%, which is based on a levered beta of 1.116. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Airgain

Strength
  • Currently debt free.
Weakness
  • Shareholders have been diluted in the past year.
Opportunity
  • Forecast to reduce losses next year.
  • Has sufficient cash runway for more than 3 years based on current free cash flows.
  • Good value based on P/S ratio and estimated fair value.
Threat
  • Not expected to become profitable over the next 3 years.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Airgain, there are three additional elements you should assess:

  1. Risks: Every company has them, and we've spotted 4 warning signs for Airgain (of which 1 makes us a bit uncomfortable!) you should know about.
  2. Future Earnings: How does AIRG's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

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