Discounted Cash Flow Valuation - Paypal PDF

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Discounted Cash Flow Valuation - Paypal...

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Introduction PayPal Holdings, Inc. is a leading technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants worldwide (PayPal, 2017). DCF is valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow (FFCF) projections and discounts them to arrive at a present value, which is then used to evaluate the potential for an investment (Investopedia, 2018). The DCF valuation estimates a company’s instrinsic value; a value based on a company’s ability to generate cash flows which is compared to a company’s current market value. If the value from the DCF analysis is higher than the current cost of the investment, it may be good investment (Investopedia, 2018). The 2-stage DCF model forecast 5-10 years into the future, the first stage is to forecast the unlevered free cash flows, the second stage is the total all cash flows after stage 1, analysts make assumptions about the company reaching mature growth. The ValuePro.net approach uses the DCF technique to value common stock, the assumptions are inputted and the intrinsic value is calculated (Wall Street Prep, 2018). For the purposes of this assignment the ValuePro.net could not be implemented for PayPal common stock as the information was unavailable in the system, therefore relative data that would normally be ascertained from ValuePro.net was obtained from various resources then recalculated in ValuePro.Net through manual input to calculate the intrinsic value.

Analysis Section Table 1.1 Intrinsic Stock Value

Excess Return Period (yrs)

130.05

10

Depreciation Rate (% of Rev)

2.9

Revenues ($mil)

13094

Investment Rate (% of Rev)

3.5

Growth Rate (%)

26.95

Working Capital (% of Rev)

2.36

Short-Term Assets ($mil)

2883

Net Oper. Profit Margin (%) Tax Rate (%)

16 18.4

Short-Term Liab. ($mil)

Stock Price ($)

77.95

Equity Risk Premium (%)

Shares Outstanding (mil)

1100

Company Beta

10-Yr Treasury Yield (%)

3.05

Value Debt Out ($mil)

Bond Spread Treasury (%) Preferred Stock Yield (%)

Assumptions:

1.5 0

Value Pref. Stock Out ($mil) Company WACC (%)

257 5 0.89 119490 0 5.3

Excess Return Period – For this figure I used 10 years for the analysis, typically for a DCF valuation a 5-year or 10-year period is selected. Revenues input came from the Income Statement on the SEC 10 K Report as 13,094 million USD. Growth Rate input came from Guru Focus as 26.95 %. Net Operating Profit Margin input came from the Income Statement on the SEC 10 K Report as 16 %. The Tax Rate input came from the Income Statement on the SEC 10 K Report as 18.4 %. The Stock Price input came from the most recent Price for PayPal (PYPL) common stock as of November 23, 2018 at $77.95 per share. The Share of Stock Outstanding came from Yahoo Finance as 1,100 million shares equivalent to 1.1 billion shares. The 10-Year Treasury Bond Yield was reported by the U.S. Department of Treasury at 3.046 % that was rounded to 3.05 %. The Preferred Stock Yield input is zero as PayPal has no preferred stock. The Depreciation Rate and Investment Rate inputs were randomly selected. The Working Capital, Short Term Assets, Short Term Liabilities inputs came from SEC 10-K Report. The Equity Risk Premium input was selected 5 % based upon the recommendation for the value Between 5 % and 6 %. The Company Beta for Stock input came from Yahoo Finance as 0.89. The Value (Book) of Debt Outstanding input came from Long-term debt and Short-term debt From the Balance Sheet on the SEC 10-K report which showed no debt. The Value Preferred Stock Outstanding is zero as PayPal has no preferred stock. Company WACC input came from SEC 10-K Report.

Table 1.2

ValuePro 2002 General Pro Forma Screen PYPL

Period

Revenues

Adj.

Change in Change in

Discount Discounted

Taxes

Invest.

Factor

NOP

NOPAT

Short-Term Assets

Total Corporate Value

Deprec.

Capital

FCFF

FCFF

0

13094

1

16622.83

2659. 65

489.38

2170.27

581.8

482.06

99.74

83.28

1987. 25

0.95

1887.89

2

21102.69

3376. 43

621.26

2755.17

738.59

611.98

126.61

105.72

2522.84

0.9

2270.56

3

26789.86

4286. 38

788.69

3497.69

937.65

776.91

160.74

134.22

3202.73

0.86

2754.35

4

34009.73

5441. 56

1001.25

4440.31

1190.34

986.28

204.06

170. 39

4065.86

0.81

3293.35

5 6

43175.35 54811.11

6908. 06 8769. 78

1271.08 1613.64

5636.98 7156.14

1511.14 1252.09 1918.39 1589.52

259.05 328.87

216.31 274.6

5161.62 6552.67

0.77 0.73

3974.45 4783. 45

9084.72

2435.39

7

69582. 7

11133. 23

2048.51

8

88335.24

14133.64

2600.59 11533.05

9

112141.58

17942.65

3301.45

10

142363. 74

22778. 2

2017.9

417.49

348.61

8318.62

0.7

5823.03

3091.73 2561.72

530.01

442.56

10560.48

0.66

6969.92

14641.2

3924.96 3252. 11

672. 85

561.83

13406.52

0.63

8446.11

4191.19 18587. 01

4982.73 4128.55

854.18

713.24

17019.59

0.6

10211.75

Residual

Discounted Excess Return Period FCFF Discounted Corporate Residual Value

Invest.

Working

351026. 02

50414.86 Total Corporate 263913.47 210615. 61 Less Debt Less Preferred 2883 Stock Less ShortTerm 263913. 47 Liabilities Total Value to Common Equity Intrinsic Stock

-119490 0

-257

144166.47 131.06

210615.61

Summary/Conclusion The DCF valuation analysis produced an intrinsic common stock value of 130.05 for the ValuePro.net and from the Free Cash Flow to Firms (FCFF) and Free Cash Flow to Equity (FCFE) the instrinsic common stock value was 131.06. The DCF analysis for PayPal (PYPL) common stock is higher than the current cost of the investment which shows its undervalued and it appears that it will be a good investment. The pros to using the DCF valuation it determines the intrinsic value of a business, it does not require any comparable companies, and it includes all major assumptions. The cons to using to using the DCF valuation is that it requires a large number of assumptions, prone to errors, looks at company valuation in isolation, very sensitive to changes in assumptions, and challenging to estimate the Weighted Average Cost of Capital (WACC). The difference between the intrinsic value and market value known as the price to book (P/B) ratio states the intrinsic value it equivalent to the book value and is the amount a shareholder would receive if the company were liquidated today. If PayPal was liquidated today the intrinsic values shows the company is worth much more than its market value based on the current stock price. PayPal is a great growth stock but not good for income driven investors it has no divided policy and does not issue any preferred stock as well.

References Corporate Financial Institute (CFI). (2018). Discounted Cash Flow DCF Formula. Retrieved from https://corporatefinancialinstitute.com/resources/knowledge/valuation/dcf-formula-guide/ Investopedia. (n.d). Introduction to Discounted Cash Flow Valuation. Retrieved from https://www.investopedia.com/walkthrough/corporate-finance/3/discounted-cashflow/introduction.aspx Yahoo Finance. (2018). PayPal Holdings Inc. (PYPL). Retrieved from https://finance.yahoo.com/quote/PYPL/balance-sheet?p=PYPL CNBC. (2018). U.S. 10-Year Treasury. Retrieved from https://www.cnbc.com/quotes/? symbol=US10Y U.S. Department of the Treasury. (2018). Daily Treasury Yield Curve Rates. Retrieved from https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx? data=yieldYear&year=2018 Federal Reserve Bank of St. Louis (FRED). (2018). Moody’s Seasoned Baa Corporate Bond Yield Relative to Yield on 10-Year Treasury Constant Maturity. Retrieved from https://fred.stlouisfed.org/series/BAA10Y PayPal. (n.d.). PayPal Investor Relations. PayPal 2017 Annual Report/Form 10-K. Retrieved from https://investor.paypal-corp.com/secfiling.cfm?filingID=1633917-18-29&CIK=1633917 Guru Focus. (n.d.). PayPal. Retrieved from https://www.gurufocus.com/dcf/PYPL Wall Street Prep. (2018). DCF Model Trainings: 6 Steps Building a DCF Model in Excel. Retrieved from https://www.wallstreetprep.com/knowledge/dcf-model-training-6-steps-buildingdcf-model-excel/...