Amkor Technology, Inc. (NASDAQ: AMKR ) is trading at a 26% discount?

In this article, we will estimate the intrinsic value of Amkor Technology, Inc. (NASDAQ: AMKR ) by estimating the company’s future cash flows and discounting them to their present value. One way to achieve this is by using the discounted cash flow (DCF) model. It might sound complicated, but it’s actually quite simple!

We would caution that there are many ways to value a company and, like DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen on equity analysis, the Simply Wall St analysis model here may interest you.

Check out our latest analysis on Amkor Technology

Crunching the numbers

We use the two-stage growth model, which simply means that we consider two stages of company growth. In the initial period, the company may have a higher growth rate and it is generally assumed that the second stage has a stable growth rate. To begin with, we need to obtain estimates for the next ten years of cash flows. Since we don’t have analyst estimates for free cash flow, we extrapolated the previous free cash flow (FCF) from the company’s last reported value. We predict that companies with declining free cash flow will slow their rate of contraction and that companies with increasing free cash flow will see their growth slow during this period. We do this to reflect that growth tends to slow more in the early years than in the later years.

We generally assume that a dollar today is worth more than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:

10-Year Free Cash Flow (FCF) Forecast.

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Leveraged FCF ($, million)

410.1 million US dollars

426.1 million US dollars

440.3 million US dollars

453.1 million US dollars

US$465.0 million

476.2 million US dollars

US$487.0 million

497.6 million US dollars

508.1 million US dollars

518.5 million US dollars

Growth Rate Estimation Source

Is @ 4.76%

Is @ 3.92%

Is @ 3.32%

Is @ 2.91%

Is @ 2.62%

Is @ 2.41%

Is @ 2.27%

Is @ 2.17%

Is @ 2.1%

E @ 2.05%

Present value ($, million) discounted at 7.7%

381 USD

367 USD

353 USD

337 USD

321 USD

305 USD

290 USD

275 USD

261 USD

247 USD

(“Est” = FCF growth rate calculated by Simply Wall St)
Present Value of 10 Year Cash Flow (PVCF) = US$3.1 billion

Now we need to calculate the terminal value, which takes into account all future cash flows after this ten-year period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year Treasury yield of 1.9%. We discount the terminal cash flows to present value at a cost of equity of 7.7%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$518 million × (1 + 1.9%) ÷ (7.7%– 1.9%) = US$9.2 billion

Present Value of Final Value (PVTV)= TV / (1 + r)10= US$9.2 billion ÷ (1 + 7.7%)10= US$4.4 billion

The total value is the sum of the cash flows for the next ten years plus the discounted terminal value, resulting in the total equity value, which in this case is $7.5 billion. In the final step, we divide the equity value by the number of shares outstanding. Compared to the current share price of $22.7, the company looks a bit undervalued at a 26% discount to the share price it’s currently trading. Assumptions in any calculation have a big impact on the estimate, so it’s better to think of this as a rough estimate rather than down to the last cent.

dcf

Important assumptions

The above calculation is highly 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 estimate of a company’s future performance, so try the calculation yourself and check your own assumptions. DCF also does not take into account the possible cyclicality of the industry or the future capital requirements of the company, so it does not give a complete picture of the potential performance of the company. Given that we are looking at Amkor Technology as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or the weighted average cost of capital, WACC), which accounts for debt. In this calculation, we used 7.7%, which is based on a liveried beta of 1.356. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the industry average beta of globally comparable companies, with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable business.

Look forward:

Valuation is only one side of the coin when it comes to building your investment case, and ideally it won’t be the only analysis you scrutinize about a company. The DCF model is not a perfect stock valuation tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would cause the company to be undervalued or overvalued. For example, changes in the company’s cost of equity or the risk-free rate can significantly affect the valuation. What is the reason why the stock price is below the intrinsic value? For Amkor Technology, we’ve compiled three key elements to keep in mind:

  1. Financial health: Does AMKR have a healthy balance sheet? Check out our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Future earnings: What is AMKR’s growth rate compared to its competitors and the wider market? Take a deeper look at the analyst consensus number for the coming years by interacting with our free analyst growth forecast chart.

  3. Other high-quality alternatives: Do you like a good all-rounder? Check out our interactive list of high-quality stocks to get an idea of ​​what else is out there that you might be missing!

PS. The Simply Wall St app performs a discounted cash flow estimate for each NASDAQGS stock every day. If you want to find the calculation for other stocks, just search here.

Have feedback on this article? Concerned about content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts, using only an unbiased methodology, and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. We aim to provide you with long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.

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