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A Look At The Fair Value Of Hour Loop, Inc. (NASDAQ:HOUR)

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1 day ago

December 27, 2024

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A Look At The Fair Value Of Hour Loop, Inc. (NASDAQ:HOUR)

The projected fair value for Hour Loop is US$2.99 based on 2 Stage Free Cash Flow to Equity
With US$3.58 share price, Hour Loop appears to be trading close to its estimated fair value
The average discount for Hour Loop’s competitorsis currently 27%

Today we will run through one way of estimating the intrinsic value of Hour Loop, Inc. (NASDAQ:HOUR) by estimating the company’s future cash flows and discounting them to their present value. One way to achieve this is by employing 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.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Hour Loop

We’re using the 2-stage 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. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company’s last 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF ($, Millions)	US$934.1k	US$1.55m	US$2.28m	US$3.06m	US$3.80m	US$4.48m	US$5.08m	US$5.60m	US$6.04m	US$6.41m
Growth Rate Estimate Source	Est @ 93.50%	Est @ 66.23%	Est @ 47.15%	Est @ 33.79%	Est @ 24.44%	Est @ 17.89%	Est @ 13.31%	Est @ 10.10%	Est @ 7.86%	Est @ 6.29%
Present Value ($, Millions) Discounted @ 6.9%	US$0.9	US$1.4	US$1.9	US$2.3	US$2.7	US$3.0	US$3.2	US$3.3	US$3.3	US$3.3

(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$25m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 5-year average of the 10-year government bond yield (2.6%) to estimate future growth. In the same way as with the 10-year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 6.9%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = US$6.4m× (1 + 2.6%) ÷ (6.9%– 2.6%) = US$155m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$155m÷ ( 1 + 6.9%)¹⁰= US$80m

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$105m. 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$3.6, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

NasdaqCM:HOUR Discounted Cash Flow December 27th 2024

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company’s future performance, so try the calculation yourself and check your own 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 Hour Loop 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 6.9%, which is based on a levered beta of 1.029. 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.

Strength

Weakness

Opportunity

Threat

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you’d apply different cases and assumptions and see how they would impact the company’s valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Hour Loop, we’ve compiled three important aspects you should explore:

Risks: You should be aware of the 3 warning signs for Hour Loop we’ve uncovered before considering an investment in the company.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (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 long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.