Sat. Dec 2nd, 2023
Viasat Valuation: Using the 2-Stage Free Cash Flow to Equity Model

Viasat, Inc. (NASDAQ:VSAT) is estimated to be 36% undervalued based on its current share price of US$18.97. Using the 2-Stage Free Cash Flow to Equity model, our fair value estimate for Viasat is US$29.83, which is 23% lower than the analyst price target of US$38.57.

The Discounted Cash Flow (DCF) model is used to estimate the attractiveness of Viasat as an investment opportunity. This model involves taking the expected future cash flows and discounting them to their present value. The DCF model is a commonly used valuation method with advantages and disadvantages.

In the 2-Stage model, we estimate the next ten years of cash flows for Viasat. Analyst estimates are used when available, but we extrapolate from previous free cash flow if necessary. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, while companies with growing free cash flow will see their growth rate slow over time.

The future cash flows are discounted to their present value using a discount rate of 12%, reflecting the idea that a dollar today is worth more than a dollar in the future. The present value of the ten-year cash flow is the sum of these discounted cash flows, which is calculated to be US$885m.

To calculate the Terminal Value, which accounts for all the future cash flows beyond the initial ten-year period, we use the Gordon Growth formula. The Terminal Value is discounted to its present value at a cost of equity of 12%. The present value of the Terminal Value is calculated to be US$2.8b.

The Total Equity Value, which is the sum of the ten-year cash flow and the discounted Terminal Value, is US$3.7b. To determine the intrinsic value per share, this Total Equity Value is divided by the total number of shares outstanding. This results in an intrinsic value per share of US$29.83.

Compared to the current share price of US$18.97, Viasat appears to be undervalued at a 36% discount. However, it’s important to note that valuation calculations are based on certain assumptions and should be viewed as rough estimates rather than precise figures.

It’s also important to consider factors beyond valuation when evaluating a company. For Viasat, potential shareholders should assess risks, management performance, and other solid businesses in the industry.