Today we’ll do a simple run through of a valuation method used to estimate the attractiveness of Pluralsight, Inc. (NASDAQ:PS) as an investment opportunity by estimating the company’s future cash flows and discounting them to their present value. Our analysis will employ 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
View our latest analysis for Pluralsight
The model
We’re using the 2stage 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. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:
10year free cash flow (FCF) estimate
2021 
2022 
2023 
2024 
2025 
2026 
2027 
2028 
2029 
2030 

Levered FCF ($, Millions) 
US$7.13m 
US$36.9m 
US$76.6m 
US$107.7m 
US$131.8m 
US$153.3m 
US$171.8m 
US$187.5m 
US$200.7m 
US$211.9m 
Growth Rate Estimate Source 
Analyst x4 
Analyst x2 
Analyst x1 
Analyst x1 
Est @ 22.35% 
Est @ 16.31% 
Est @ 12.09% 
Est @ 9.13% 
Est @ 7.05% 
Est @ 5.6% 
Present Value ($, Millions) Discounted @ 8.6% 
US$6.6 
US$31.3 
US$59.8 
US$77.5 
US$87.3 
US$93.5 
US$96.6 
US$97.0 
US$95.7 
US$93.0 
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10year Cash Flow (PVCF) = US$738m
After calculating the present value of future cash flows in the initial 10year 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 5year average of the 10year government bond yield of 2.2%. We discount the terminal cash flows to today’s value at a cost of equity of 8.6%.
Terminal Value (TV)= FCF_{2030} × (1 + g) ÷ (r – g) = US$212m× (1 + 2.2%) ÷ (8.6%– 2.2%) = US$3.4b
Present Value of Terminal Value (PVTV)= TV / (1 + r)^{10}= US$3.4b÷ ( 1 + 8.6%)^{10}= US$1.5b
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$2.2b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$20.8, the company appears potentially overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.
Important assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don’t agree with these result, have a go at the calculation yourself and play with the 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 Pluralsight 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 8.6%, which is based on a levered beta of 1.058. 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.
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. Rather it should be seen as a guide to “what assumptions need to be true for this stock to be under/overvalued?” For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price exceeding the intrinsic value? For Pluralsight, we’ve put together three essential aspects you should consider:

Risks: You should be aware of the 3 warning signs for Pluralsight we’ve uncovered before considering an investment in the company.

Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for PS’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

Other High Quality Alternatives: Do you like a good allrounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
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.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you longterm focused analysis driven by fundamental data. Note that our analysis may not factor in the latest pricesensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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