5. STOCK MARKET AND REVERSE-ENGINEREED DCF MODEL
5.3 Implied Growth Rates
5.3.2 Selecting Case Companies
For further investigation, this paper finds it appropriate to assess one company from each category.
By doing so, the analysis is able to cover companies in different stages in the business life cycle and conduct analysis from two different perspectives. Regarding the growth stocks-category, Twilio and Slack will be excluded. Due to high uncertainty around the calculated growth rates induced from the pro forma sheets, these companies are not applicable for further analysis. The remaining companies also have high growth rates, but these are calculated from actual generated FCFF, giving the calculations increased validity. To assess whether the implied growth rates are sustainable, this paper finds it appropriate to focus on seemingly competitive players. To select one of the remaining companies, we have chosen to look at the development of revenue growth in the last 5 years. Revenue growth is, as mentioned, one of the key drivers in the SaaS industry due to the ease associated with scalability. By picking a company with high top-line growth in the past 5 years, one makes sure that the company being analyzed is a prominent player aiming to capture
74 market share in the years to come. In this sense, if finding that the implicit growth rate of a major player is unsustainable, it is reasonable to assume that the rest of industry is possibly overvalued as well.
Figure 13 demonstrates how Zoom has generated a staggering growth in revenues, especially in 2020, significantly outperforming the rest of the competitors. Zoom clearly took advantage of the pandemic, and this makes them an interesting prospect for further investigation. Zoom generated a growth in revenue of an incredible 326% in 2020 and is the company with highest revenue growth and highest P/E ratio of the companies in question. Similarly, when it comes to the value stocks, there is one stock that stands out from the revenue growth-chart; Microsoft has delivered an annual growth in revenue that clearly differentiates them from the rest of the value stocks as seen in Figure 14. Microsoft also has the highest P/E-ratio in the value stock category.
Zoom and Microsoft also have the best stock performance in their respective categories in 2020.
In this sense, one could argue that the market expects these companies to benefit more from the pandemic than other companies, which provides an intriguing foundation for further investigation.
Figure 13: Revenue Growth 2016-2020 - Revenue Stocks Source: Bjørnson & Hauer (2021) Based on Data from Yahoo Finance 0%
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2016 2017 2018 2019 2020
Revenue Growth 2016-2020 - Growth Stocks
Zoom Slack Twilio DocuDign Dropbox Salesforce.com Adobe Revenue Growth
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Figure 14: Revenue Growth 2016-2020 - Value Stocks Source: Bjørnson & Hauer (2021) Based on Data from Yahoo Finance
In addition to the above reasoning for picking Zoom and Microsoft, another practical implication has been considered. All value stocks, except Microsoft, yield a negative implied growth rate in the forecast period. Due to the way the applied model is constructed this creates challenges: A multi-staged DCF model assumes a terminal value beyond the forecasted period where future cash flows are estimated. The terminal value assumes a constant growth rate forever after the forecast period. In this analysis, the base case terminal growth rate is set to 3%. In practical terms, this means that the companies in question will experience negative growth in ten years, before having a constant growth of 3% for eternity. This creates logical flaws and makes the companies sub-optimal for further analysis. This reveals limitations in the model and will be discussed in more detail in section 8.
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Revenue Growth 2016-2020 - Value Stocks
Microsoft Cisco Oracle IBM Revenue Growth
76 5.3.2.1 Microsoft’s Implied Growth Rate
Microsoft’s implied FCFF is expected to increase by 4,5% annually the next 10 years. The 2020 FCFF of USD 44,152 billion is estimated to be USD 46,123 billion in 2021 and USD 68,335 billion in 2030. After a decline of 20,9% in FY2016, Microsoft has reported a FCFF growth of 58,3 % in FY2017, 22,6 %in FY 2018 and 13% in FY2019. In this regard, the implied growth of 4,5% over the forecast period is consistent with the past trend and appears to be achievable. The estimation derives from a WACC of 6,26%, which in turn is based on an average industry beta of 0,8632.
Figure 15: Microsoft's Implied Growth Rate 2020-2030 Source: Bjørnson & Hauer (2021)
77 Calculation of Unlevered Cash Flow 2020
Earnings Before Taxes + $ 60 726 000 000
Net Interest Expense + $ 69 000 000
Non-Operating Expenses + $ -229 000 000
Unusual Expenses + $ -411 000 000
EBIT = $ 60 155 000 000
Marginal Tax Rate - 15 %
NOPAT = $ 51 131 750 000
Depreciation and Amortization + $ 11 532 000 000
Capital Expenditures - $ 17 592 000 000
Investment in Net Working Capital - $ 920 000 000 Unlevered Free Cash Flow as of 01/01/2021 = $ 44 151 750 000 Calculation of Net Interest-bearing debt 2020
Total Debt + $ 82 782 000 000
Cash, Cash Equivalents & Short-term Investments - $ 132 000 000 000 Net Interest-bearing Debt = = $ -49 218 000 000
Unlevered FCF $ 44 151 750 000 WACC 6,26 %
Shares Outstanding 7 542 000 000 Terminal
Growth Rate 3,00 %
Net Interest-bearing Debt $ -49 218 000 000 Forecasting period
Year 2020 + FV DF DCF
1 $ 46 122 862 370 0,9411 $ 43 407 383 875 2 $ 48 181 973 155 0,8857 $ 42 675 567 218 3 $ 50 333 010 958 0,8336 $ 41 956 088 452 4 $ 52 580 079 772 0,7845 $ 41 248 739 571 5 $ 54 927 466 811 0,7383 $ 40 553 316 073 6 $ 57 379 650 683 0,6948 $ 39 869 616 906 7 $ 59 941 309 944 0,6539 $ 39 197 444 405 8 $ 62 617 332 016 0,6154 $ 38 536 604 239 9 $ 65 412 822 517 0,5792 $ 37 886 905 354 10 $ 68 333 115 001 0,5451 $ 37 248 159 915
Sum of DCF $ 446 731 576 008
Discounted Terminal Value $ 1 178 377 716 522
Enterprise Value $ 1 625 109 292 530
Equity Value $ 1 674 327 292 530
Per Share Value $ 222,00 Share Price as of 01/01/2021 $ 222,00
(E) 10-year Annual Growth rate 4,46 %
Figure 16: Reverse Engineered DCF of Microsoft
Source: Bjørnson & Hauer (2021) Based on Data from Yahoo Finance & SEC Filings
78 5.3.2.2 Zoom’s Implied Growth Rate
Zoom’s implied growth rate is 19,9%. The company achieved an unlevered FCFF of 753,68 million USD in 2020, which was an astonishing 3182% increase compared to 2019. If the implied growth rate of 19,9% is to be taken into consideration, the market expects Zoom’s FCFF to be 903,7 million USD in 2021 and 4,629 billion USD in 2030. As seen by figure 16, Zoom’s implied growth in FCFF is quite exponential and to meet market expectations, FCFF will need to increase by hundreds of millions of USD each year.
The implied growth rate is calculated using a WACC of 6,26% which derives from an industry beta of 0,8632. This is the same as for Microsoft. Because of their similar capital structures, Zoom and Microsoft end up with the same WACC. This is highly debatable, and the uncertainty surrounding it will be addressed in a sensitivity analysis.
Figure 17: Zoom's Implied Growth Rate 2020-2030 Source: Bjørnson & Hauer (2021)
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Calculation of Unlevered Cash Flow 2020
Earnings Before Taxes + $ 427 900 000
Net Interest Expense + $ -8 504 000
Non-Operating Expenses + $ -
Unusual Expenses + $ 4 662 000
EBIT = $ 424 058 000
Marginal Tax Rate - 41 %
NOPAT = $ 250 194 220
Depreciation and Amortization + $ 24 261 000
Capital Expenditures - $ 68 469 000
Investment in Net Working Capital - $ -547 700 000 Unlevered Free Cash Flow as of 01/01/2021 = $ 753 686 220 Calculation of Net Interest-bearing debt 2020
Total Debt + $ 70 372 000
Cash, Cash Equivalents & Short-term Investments - $ 1 871 931 000 Net Interest-bearing Debt = = $ -1 801 559 000
Unlevered FCFF $ 753 686 220 WACC 6,26 %
Shares Outstanding 290 618 314 Terminal
Growth rate 3,00 %
Net Interest-bearing Debt $ -1 801 559 000 Forecasting period
Year 2020 + FV DF DCF
1 $ 903 702 111 0,9411 $ 850 496 748 2 $ 1 083 577 601 0,8857 $ 959 742 528 3 $ 1 299 256 029 0,8336 $ 1 083 020 861 4 $ 1 557 863 717 0,7845 $ 1 222 134 220 5 $ 1 867 945 430 0,7383 $ 1 379 116 603 6 $ 2 239 746 706 0,6948 $ 1 556 263 276 7 $ 2 685 552 387 0,6539 $ 1 756 164 329 8 $ 3 220 092 523 0,6154 $ 1 981 742 549 9 $ 3 861 029 078 0,5792 $ 2 236 296 151 10 $ 4 629 539 504 0,5451 $ 2 523 547 006
Sum of DCF $ 16 302 210 491
Discounted Terminal Value $ 79 834 589 560
Enterprise Value $ 96 136 800 051
Equity Value $ 97 938 359 051
Per Share Value $ 337,00 Share Price as of 01/01/2021 $ 337,00
(E) 10-year Annual Growth rate 19,90 %
Figure 18: Reverse Engineered DCF of Zoom
Source: Bjørnson & Hauer (2021) Based on Data from Yahoo Finance & SEC Filings
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