A Look At The Fair Value Of NIO Limited


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A Look At The Fair Value Of NIO Limited

Today we will run through one way of estimating the intrinsic value of NIO Limited (NYSE:NIO) by projecting its future cash flows and then discounting them to today’s value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

The calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. 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, 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

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Levered FCF (CN¥, Millions) -CN¥2.59b CN¥36.6m CN¥1.90b CN¥7.42b CN¥13.0b CN¥20.0b CN¥27.6b CN¥35.1b CN¥42.0b CN¥48.1b
Growth Rate Estimate Source Analyst x6 Analyst x5 Analyst x4 Analyst x2 Est @ 75.4% Est @ 53.45% Est @ 38.08% Est @ 27.32% Est @ 19.79% Est @ 14.52%
Present Value (CN¥, Millions) Discounted @ 12% -CN¥2.3k CN¥29.3 CN¥1.4k CN¥4.7k CN¥7.4k CN¥10.2k CN¥12.6k CN¥14.3k CN¥15.3k CN¥15.7k

(“Est” = FCF growth rate estimated by Simply Wall St)

Present Value of 10-year Cash Flow (PVCF) = CN¥79b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.2%) to estimate future growth. In the same way as with the 10-year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 12%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = CN¥48b× (1 + 2.2%) ÷ (12%– 2.2%) = CN¥511b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥511b÷ ( 1 + 12%)10= CN¥167b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CN¥246b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$21.4, the company appears about fair value at a 20% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.


NIO – (NYSE) is in our Selection List at our Stock Advisor.
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Source: https://finance.yahoo.com/news/look-fair-value-nio-limited-153706449.htmlb

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