A Look at The Fair Value Of Trade Desk, Inc.

What is the December share-price for The Trade Desk, Inc.NASDAQ:TTDWhat does the stock’s actual value really reflect? Today, we’ll estimate the stock’s intrinsic value by taking its future cash flows and then discounting them to the stock’s present value. This will be done with the Discounted Cash flow (DCF) method. This may seem complicated but it’s really quite easy.

Keep in mind, however, that there are many methods to assess a company’s value. A DCF is one of these methods. You can read the detailed explanation about discounted cash flows to find out more about it. Simply Wall St analysis model.

View our latest analysis for Trade Desk

The Model

A 2-stage model is what we use. It simply means there are two periods of growth for cash flows. The first stage generally has higher growth while the second stage has lower growth. We need to project the cash flows of the business over the next ten-years in the first stage. We use analyst estimates whenever possible. However, if these are not available, we extrapolate the prior free cash flow (FCF), from the last estimate/reported value. Companies with decreasing free cash flow will experience a slower rate of shrinkage. However, companies with increasing free cash flow should expect to see a slowing in their growth rate over the same period. This is because growth tends to slow down more in the beginning years than in the later years.

We assume that a dollar is more valuable today than it will be in the future. So we value future cash flows in dollars today and discount their value.

10 year free cash flow (FCF), estimate

(“Est” = FCF growth rate as estimated by Simply Wall St.
Current Value of 10-year Cash Flow (PVCF). = US$6.8b

After calculating future cash flows over the initial 10 years, we must calculate the Terminal Valu, which is the sum of all future cash flows. To calculate the Terminal Value, we use the Gordon Growth formula at a future annual rate equal to the average 10-year government bond yield 2.0%. At 6.5% equity cost, we reduce the terminal cash flows into today’s value.

Terminal Value (TV).= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = US$1.2b× (1 + 2.0%) ÷ (6.5%– 2.0%) = US$26b

Present Value of Terminal Valu (PVTV).= TV / (1 + R)¹⁰= US$26b÷ ( 1 + 6.5%)¹⁰= US$14b

The sum of the future cash flows present value and equity value (in this case, US$21b) is called the total value. Divide the number of shares outstanding by this to get the intrinsic value per share. At the time of writing, the company is approximately fair value relative to its current share price of US$45.3. This is an estimate valuation. As with any complicated formula, it’s garbage in, garbage out.

The Assumptions

The actual cash flows and the discount rate are two of the most critical inputs to a discounted flow. You can also use the calculator to evaluate the company’s future performance and make your own assumptions. The DCF doesn’t take into consideration the potential cyclicality in an industry or a company’s future capital needs, so it is not a comprehensive picture of a company’s potential performances. Trade Desk is being considered as potential shareholders. Therefore, the discount rate is the cost-of-equity. This is in contrast to the cost capital (or weighted average capital cost, WACC), which accounts for debt. Based on a leveraged beta of 0.804, 6.5% was used in this calculation. Beta is the measure of a stock’s volatility relative to the entire market. Our beta is determined from the industry’s average beta of globally comparable businesses. There is an imposed limit between 0.8% and 2.0. This is a reasonable range to consider stable businesses.

SWOT Analysis of Trade Desk

Strength

Weakness

Opportunity

Threat

Moving on:

The DCF calculation is an important metric, but it should not be the only one you consider when researching a company. With a DCF model, it’s impossible to get a perfect valuation. Instead, it should be used to guide you to what assumptions must be true in order for the stock to be under/overvalued. The result can be dramatically altered if the terminal values growth rate is adjusted in any way. We have three additional aspects to Trade Desk that you should consider:

1. Financial HealthIs TTD able to maintain a healthy balance? Have a look at our free balance sheet analysis with six simple checks Key factors such as leverage and risk.

2. Future Earnings: How does TTD’s rate of growth compare to other companies and the larger market? Interact with our team to learn more about the consensus number of analysts for the next years. free analyst growth expectation chart.

3. Other high quality alternatives: Are You a great all-rounder? Explore our interactive list of high quality stocks Get an idea of what else you might be missing

PS. Simply Wall St is constantly updating its DCF calculation for each American stock every single day. So if you’re looking to determine the intrinsic value any other stock, simply search here.

Give feedback about this article Are you concerned about the content? Get in touch Get in touch with us. Alternatively, email editorial-team (at) simplywallst.com.

This article is by Simply Wall St. It is general in nature. Our commentary is based on historical data, analyst forecasts and other unbiased information. We do not intend to provide financial advice. This analysis does not represent a recommendation to purchase or sell any stock and it does not consider your financial goals or financial situation. Our goal is to provide you with long-term, focused analysis based on fundamental data. Please note that our analysis might not include the latest announcements from price-sensitive companies or qualitative material. Simply Wall St holds no position in any of the stocks mentioned.

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