Selecting a Method for Determining a Stock’s Intrinsic Value
Justification
DCF analysis is widely used to determine a stock’s intrinsic value. It is popular due to its ability to consider projected future cash flows, providing a comprehensive valuation of a company. DCF primarily examines expected financial profits (Keown et al., 2019). Cash flow is vital in accurately reflecting expected investor profits. It also considers anticipated growth and risk (Keown et al., 2019).
DCF adjusts future cash flows to their present-day equivalent, accounting for the time value of money and investing risks. The DCF method can be customized for different scenarios, incorporating growth rate, final value, and the appropriate discount rate (Keown et al., 2019). This customization makes the analysis relevant to specific companies and industries.
Application
An example of DCF calculation can shed more light on this concept’s application. To obtain the necessary value, one should conduct several calculations. First, one would need to estimate the future cash flows (FCF) generated by Saudi Telecom Co. (Keown et al., 2019). According to Simply Wall St (2023), the present value of 10 years of FCF is 100ر. س billion. Next, one should focus on the terminal value of Saudi Telecom Co. at the end of the forecast period, which is 177 ر. س billion (Keown et al., 2019; Simply Wall St, 2023).
The total equity value is determined by a sum of FCF and terminal value: 100 + 177 = 277 ر. س billion (Keown et al., 2019). In this context, Saudi Telecom Co. has 5,013,985,484 ر. س of shares outstanding (CompaniesMarketCap, n.d.). Thus, the intrinsic stock value of Saudi Telecom Co. will be calculated by dividing the company’s total equity value by the number of its shares outstanding, resulting in 55.25 ر. س.
Intrinsic Value Analysis of a Saudi Publicly Traded Company
Comparing the intrinsic value with the actual stock price provides valuable insights. MarketWatch (n.d.) reports that the actual stock price of Saudi Telecom Co. is currently 38.25 ر. س is 31% lower than the intrinsic value, making it underpriced. This implies that Saudi Telecom Co. is worth considering for long-term investment, as underpriced stock presents high investment return opportunities when it reaches the level of its intrinsic value.
Understanding a stock’s intrinsic value is crucial for business leaders in Saudi Arabia, especially in Saudi Vision 2030. The strategic objective is to diversify the Saudi economy while simultaneously seeking improvements in other parts of society (Kingdom of Saudi Arabia, 2023). To achieve this, informed investment decisions are essential as investing in undervalued stocks attracts domestic and international investors, aligning with the goals of Saudi Vision 2030.
Relevance to Business Leaders and Saudi Vision 2030
In this context, also driven by Saudi Vision 2030’s objectives, investing in renewable energy has gained significance. It is thus essential to assess future investment plans regarding investment profitability. Conveniently, an article by Alshebami et al. (2023) directly relates to investment profitability, intrinsic value, and doing business in Saudi Arabia. It proposes solutions to address renewable energy uncertainties, allowing the country to move closer to a better future.
References
Alshebami, A. S., Alholiby, M. S., Elshaer, I. A., Sobaih, A. E. E., & Al Marri, S. H. (2023). Examining the relationship between green mindfulness, spiritual intelligence, and environmental self identity: Unveiling the path to green entrepreneurial intention. Administrative Sciences, 13(10), 1-17. Web.
CompaniesMarketCap. (n.d.). Saudi Telecom Company. Web.
Keown, A., Martin, J., & Petty, J. (2019). Foundations of finance (10th ed.). Pearson Education.
Kingdom of Saudi Arabia. (2023). Saudi Vision 2030. Web.
MarketWatch. (n.d.). Saudi Telecom Co. Web.
Simply Wall St. (2023). Saudi Telecom Company’s (TADAWUL:7010) intrinsic value is potentially 30% above its share price. Web.