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The DCF model operates in a two-stage process where two different growth periods are considered for the company’s cash flows. Generally, the first stage represents a higher growth phase, while the second stage indicates a slower growth phase. The initial step involves estimating the cash flows for the next decade, utilizing analyst estimates where available or extrapolating from either the last estimated or reported free cash flow (FCF) value.
The fundamental principle behind DCF is that a dollar today holds more value than a dollar in the future. Consequently, these future cash flows are discounted back to their present worth. In PowerSchool Holdings’ case, the Present Value of 10-year Cash Flow (PVCF) is estimated to be $2.1 billion.
According to the 2 Stage Free Cash Flow to Equity method, PowerSchool Holdings’ fair value estimate is $30.19 per share. This valuation suggests that the company might be undervalued by approximately 26%, given its current share price of $22.40 on Tuesday.
However, it is crucial to note that analysts have set a price target for PWSC at $27.21, which is still 9.9% lower than the fair value estimate. This discrepancy demonstrates the inherent uncertainty and variability in financial modeling and valuation methods.
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