Does the November share price for Check Point Software Technologies Ltd. (NASDAQ:CHKP) reflects what it’s really worth? Today, we will estimate the stock’s intrinsic value by estimating the company’s future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they’re fairly easy to follow.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
View our latest analysis for Check Point Software Technologies
What’s The Estimated Valuation?
We’re using the 2stage growth model, which simply means we take into account two stages of the 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. To begin with, we have to get estimates of 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 reduced free cash flow will slow their rate of depreciation, 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today’s value:
10year free cash flow (FCF) estimate
2023 
2024 
2025 
2026 
2027 
2028 
2029 
2030 
2031 
2032 

Leveraged FCF ($, Millions) 
US$1.21b 
US$1.24b 
US$1.36b 
US$1.20b 
US$1.29b 
US$1.37b 
US$1.43b 
US$1.49b 
US$1.54b 
US$1.58b 
Growth Rate Estimate Source 
Analyst x13 
Analyst x7 
Est @ 9.91% 
Analyst x1 
Est @ 7.53% 
Est @ 5.87% 
Est @ 4.7% 
Est @ 3.88% 
Est @ 3.31% 
Est @ 2.91% 
Present Value ($, Millions) Discounted @ 7.9% 
US$1.1k 
US$1.1k 
US$1.1k 
US$887 
US$884 
US$868 
US$843 
US$811 
US$777 
US$742 
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10year Cash Flow (PVCF) = US$9.1b
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. 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 5year average of the 10year government bond yield (2.0%) to estimate future growth. In the same way as with the 10year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 7.9%.
Terminal Value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = US$1.6b× (1 + 2.0%) ÷ (7.9%– 2.0%) = US$27b
Present Value of Terminal Value (PVTV)= TV / (1 + r)^{10}= US$27b÷ ( 1 + 7.9%)^{10}= US$13b
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$22b. The last step is to then divide the equity value by the number of outstanding shares. Relative to the current share price of US$131, the company appears a touch undervalued at a 25% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Check Point Software Technologies 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 7.9%, which is based on a leveraged beta of 0.986. 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.
Moving On:
While it’s important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the beall and endall of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For Check Point Software Technologies, we’ve put together three pertinent aspects you should look at:

Financial Health: Does CHKP have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

Future Earnings: How does CHKP’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

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. The Simply Wall Street app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks, just search here.
Have feedback on this article? Concerned about the content? get in touch with us directly. Alternatively, email editorialteam (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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