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A Look At The Fair Value Of Remitly Global, Inc. (NASDAQ:RELY)

Key Insights

  • The projected fair value for Remitly Global is US$14.14 based on 2 Stage Free Cash Flow to Equity

  • Current share price of US$14.19 suggests Remitly Global is potentially trading close to its fair value

  • Analyst price target for RELY is US$16.50, which is 17% above our fair value estimate

Today we will run through one way of estimating the intrinsic value of Remitly Global, Inc. (NASDAQ:RELY) by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

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Check out our latest analysis for Remitly Global

Crunching The Numbers

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Levered FCF ($, Millions)

US$74.0m

-US$4.00m

US$54.0m

US$80.4m

US$108.4m

US$135.5m

US$160.1m

US$181.4m

US$199.4m

US$214.5m

Growth Rate Estimate Source

Analyst x1

Analyst x1

Analyst x1

Est @ 48.88%

Est @ 34.84%

Est @ 25.01%

Est @ 18.13%

Est @ 13.31%

Est @ 9.94%

Est @ 7.58%

Present Value ($, Millions) Discounted @ 8.0%

US$68.5

-US$3.4

US$42.8

US$59.0

US$73.7

US$85.3

US$93.2

US$97.8

US$99.5

US$99.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$716m

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 5-year average of the 10-year government bond yield (2.1%) 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 8.0%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$215m× (1 + 2.1%) ÷ (8.0%– 2.1%) = US$3.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$3.7b÷ ( 1 + 8.0%)10= US$1.7b

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$2.4b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$14.2, 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.

dcf
dcf

The Assumptions

We would point out that 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 Remitly Global 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 8.0%, which is based on a levered beta of 1.003. 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.

SWOT Analysis for Remitly Global

Strength

  • Currently debt free.

Weakness

  • Shareholders have been diluted in the past year.

Opportunity

  • Good value based on P/S ratio compared to estimated Fair P/S ratio.

Threat

  • Has less than 3 years of cash runway based on current free cash flow.

  • Not expected to become profitable over the next 3 years.

Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Remitly Global, there are three additional aspects you should assess:

  1. Risks: Every company has them, and we've spotted 3 warning signs for Remitly Global (of which 1 is potentially serious!) you should know about.

  2. Future Earnings: How does RELY'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.

  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

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.

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