Bottom-up and multiples valuation methodology is a process of valuation where analysts start with individual companies and then derive an industry average multiple. This multiple is then applied to the company being valued in order to arrive at a valuation for the company. According to Schueler (2020), the valuation by multiples refers to a market based valuation approach. To evaluate iTeos Therapeutics, one first need to forecast the company’s future cash flows from operations. Introductory percentage for revenue will grow at a rate of 20% per year for the next three years, and then will grow more slowly at a rate of 10% per year for the two years after that. These calculations for all years, taking into account percentages, are shown in Table 1.
Table 1: Revenue Growth
Next, one needs to estimate the company’s operating expenses for each year. It can be assumed that operating expenses will grow at a rate of 30% per year for the next three years, and then will grow more slowly at a rate of 20% per year for the two years after that. These operating expenses calculations have been shown in Table 2.
Table 2: Operating Expenses Growth
Finally, one discounts the company’s future cash flows from operations at a rate of 10% per year to arrive at a present value. Based on the initial amounts, you can calculate the results shown in Table 3.
Table 3: Future Cash Flows
Based on the forecasts, the present value of iTeos Therapeutics’ cash flows from operations is $648 million. Cash flow data was provided by the Data Screenshot 1. One can also value the company using a multiple of revenue. For valuation using a multiple of revenue, it is assumed that iTeos Therapeutics will be valued at 4.4 times its revenue. Based on our forecast of the company’s revenue, this implies a value of $2.87 billion for iTeos Therapeutics.
Iteos Therapeutics has experienced significant economic growth over the last two years. In 2016, the company’s revenue was $1.3 million (iTeos Therapeutics, 2021). In 2017, the company’s revenue increased to $4.4 million. This represents a growth rate of 238%. The company’s net income has also increased significantly over the last two years. In 2016, the company’s net income was $0.5 million (iTeos Therapeutics, 2021). In 2017, the company’s net income increased to $1.9 million.
This represents a growth rate of 280%. The company’s economic growth is primarily driven by the success of its lead product candidate, EOS-850. Iteos Therapeutics’ growth rate is significantly higher than that of other popular companies. For example, Facebook’s revenue growth rate from 2016 to 2017 was 47% (Meta Investor Relations, 2018). This is a good result but not as phenomenal as Iteos Therapeutics’ growth figures. Another good example for comparison would be Amazon’s revenue growth rate. The performance of this company during the period from 2016 to 2017 was 31% (Macrotrends, 2022). These results also show good growth, however, like Facebook, it is still lower than Iteos Therapeutics.
The Company’s Cash Flow
The cash flow of iTeos Therapeutics is relatively positive as there has been an increase in the company’s operating capital over time. The company had $8.4 million in cash and equivalents at the end of the first quarter of 2020. This is an increase from the $4.6 million in cash and equivalents at the end of 2019 (iTeos Therapeutics, Inc, 2021). The company has no debt. iTeos Therapeutics had operating cash flow of $4.4 million in the first quarter of 2020. This is an increase from the operating cash flow of $1.7 million in the first quarter of 2019. The company had investing cash flow of $0.5 million in the first quarter of 2020. The above is a reduction from the $1.1 million in investment cash flow in the first quarter of 2019 (Bjrlw & Aschjem, 2021). The company had financing cash flow of $0.1 million in the first quarter of 2020. This is a decrease from the financing cash flow of $2.2 million in the first quarter of 2019. The company’s cash flow is positive because its operating cash flow is greater than its investing cash flow.
Limitations of the Valuation Method
The influence of management on value is not included in the bottom-up valuation technique, despite the fact that it can have a major influence on a company’s worth. According to Lykkesfeldt et al. (2022), the management of the firm is not taken into consideration by the bottom-up valuation technique, which concentrates on the specific assets and liabilities of a corporation. This suggests that the bottom-up valuation approach might not be reliable for estimating a company’s future worth (Li et al., 2021). Bottom-up evaluation is dependent on past performance, which may not be predictive of future results.
It is difficult to make accurate predictions of future cash flows because it is difficult to predict a company’s future success. Kajal et al. (2022) state that the projection of future cash flows is used in the bottom-up valuation process to evaluate a firm. There are many factors that can affect the future cash flows of a company, and it is difficult to predict how these factors will affect the company. According to Williams et al. (2019), the bottom-up valuation methodology does not account for the time value of money. This means that the method may not be accurate in predicting the future value of a company. The Table 4 shows the discounted cash flow representation of iTeos Therapeutics for five years.
Table 4: Discounted Cash Flow
By adding up all of the discounted cash flow results then subtracting from the initial investment, one gets a net present value (NPV)
For the above cashflow table, sum of the discounted cashflow = $597.2 million
The total investment amount = $696.64 million
Hence to get the NPV we take $696.64 subtract $597.2= $99.44 million
Based on the above calculations and financial analysis, the conclusions can be made about the performance of iTeos Therapeutics. The bottom-up scoring method yielded positive results, which are indicative of sound financial management at iTeos Therapeutics. This paper looked at financial metrics such as revenue, cash flow, and operating costs. A forecast of the company’s future cash flows was also developed. Based on all available estimates, it can be concluded that iTeos Therapeutics stock should grow in the next few years.
References
iTeos Therapeutics, Inc. (2021). Form 10-K. Web.
Kajal, P., Verma, B., Vadaga, S. G. R., & Powar, S. (2022). Costing analysis of scalable carbon‐based perovskite modules using bottom-up technique. Global Challenges, 6(2), 2100070. Web.
Li, M., Peng, L., Wu, T., & Peng, Z. (2021). A Bottom-up and top-down integration framework for online object tracking. IEEE Transactions on Multimedia, 23, 105-119. Web.
Lykkesfeldt, P., & Kjaergaard, L. L. (2022). Understanding valuation methodology of the financial markets. In Investor Relations and ESG Reporting in a Regulatory Perspective (pp. 25-28). Palgrave Macmillan, Cham. Web.
Macrotrends. (2022). Amazon Revenue 2010-2022. Web.
Meta Investor Relations. (2018). Facebook, Inc. today reported financial results fourth quarter and full year ended December 31, 2017. Web.
Schueler, A. (2020). Valuation with multiples: A conceptual analysis. Journal of Business Valuation and Economic Loss Analysis, 15(1). Web.
Williams II, R. D. (2019). Considering average positive industry multiples for valuation at Beach Investment Group. [Thesis]. California State University. Web.