A member on Seeking Alpha put together a very detailed analysis of the domain name sector. Plexor took a look at several publicly traded companies on an individual basis. He then took a look at the sector as a whole. A few companies like Neustar and the smaller new gtld companies were left out. The analysis was done on a Discounted Cash Flow (DCF) basis.
From the article:
Value opinion on the DOMAIN NAMES sector based on DCF analysis
To reach the fair value of this bundle of stocks compared with its market price, the following steps were conducted:
· the added free cash flows of this bundle of companies (considered as a whole) have been projected to the future and discounted back by employing as weighted average cost of capital: a) The average of each single company WACC weighted for market capitalization; b) The average of each single company WACC;
· the sum of the operating leases and stock options for each company have been estimated and subtracted from the total market value of equity;
· the appropriate short/medium and long term FCF future growth rate of the bundle [a) Weighted for market capitalization; b) Un-weighted for market capitalization] has been estimated by looking back into the financial reports of each target company to see how it performed in the past. With the bundle meaningful enough, then the entire DOMAIN NAMES sector’s under-valuation might be inferred. The resulting figures are as follows (millions of dollars):
a) (Weighted)
FCF ttm: $ 1,320 M | WACC: 10.3% | short-medium term FCF growth rate: 9.4%
Long term FCF growth rate: 2.8% | Value of Cash, Marketable Securities & Non-Operating Assets:
$ 2,196 M| financial debts: $ 6,619 M | estimated value of operating leases and stock options: $ 709 M.
The final computed figure gives an estimated result of fair value of the bundle of companies equal to $ 25,426 M, which compared to the current (30 Apr. 2015) market price of around $ 24,007 M, shows an undervaluation of almost 5.6%.
b) (Un-weighted)
FCF ttm: $ 1,320 M | WACC: 8.8% | short-medium term FCF growth rate: 8.8%
Long term FCF growth rate: 2.8% | Value of Cash, Marketable Securities & Non-Operating Assets:
$ 2,196 M | financial debts: $ 6,619 M | estimated value of operating leases and stock options: $ 709 M.
The final computed figure gives an estimated result of fair value of the bundle of companies equal to $ 31,794 M, which compared to the current (30 Apr. 2015) market price of around $ 24,007 M, shows an undervaluation of almost 24.5%.
Financial soundness, measurable by the Altman Z-score index*, has resulted in a moderate aggregated value equal to 2.37 (weighted) and 2.09 (un-weighted) which both stand in the “grey” zone.
*The Altman Z-Score is a measure of bankruptcy risk not based on stock price volatility. It segments companies into three groups: “safe” (Z-score > 2.99), “grey” (Z-score between 2.99 and 1.81), and “distressed” (Z-score < 1.81), and may be useful for identifying bankruptcy risk in the coming years. It is based on financial statement data and market capitalization.
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