Estimating The Fair Value Of BILL Holdings, Inc. (NYSE:BILL)

Simply Wall St · 03/25 10:52

Key Insights

  • The projected fair value for BILL Holdings is US$64.02 based on 2 Stage Free Cash Flow to Equity
  • With US$68.05 share price, BILL Holdings appears to be trading close to its estimated fair value
  • Our fair value estimate is 27% lower than BILL Holdings' analyst price target of US$87.52

Today we will run through one way of estimating the intrinsic value of BILL Holdings, Inc. (NYSE:BILL) by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for BILL Holdings

The Method

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. To start off with, we need to estimate 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 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF ($, Millions) US$218.2m US$265.2m US$346.7m US$416.6m US$415.4m US$417.5m US$421.9m US$427.9m US$435.0m US$443.1m
Growth Rate Estimate Source Analyst x9 Analyst x8 Analyst x6 Analyst x2 Analyst x1 Est @ 0.51% Est @ 1.04% Est @ 1.42% Est @ 1.68% Est @ 1.86%
Present Value ($, Millions) Discounted @ 7.5% US$203 US$229 US$279 US$312 US$289 US$270 US$254 US$240 US$227 US$215

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$2.5b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 7.5%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$443m× (1 + 2.3%) ÷ (7.5%– 2.3%) = US$8.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$8.7b÷ ( 1 + 7.5%)10= US$4.2b

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$6.7b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$68.1, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
NYSE:BILL Discounted Cash Flow March 25th 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. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 BILL 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 accounts for debt. In this calculation we've used 7.5%, which is based on a levered beta of 1.134. 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 BILL Holdings

Strength
  • Cash in surplus of total debt.
Weakness
  • No major weaknesses identified for BILL.
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 compared to estimated Fair P/S ratio.
Threat
  • Debt is not well covered by operating cash flow.
  • Not expected to become profitable over the next 3 years.

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For BILL Holdings, we've put together three pertinent aspects you should assess:

  1. Risks: We feel that you should assess the 1 warning sign for BILL Holdings we've flagged before making an investment in the company.
  2. Future Earnings: How does BILL'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 High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.