Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) Shares Could Be 48% Below Their Intrinsic Value Estimate

In This Article:

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Vertex Pharmaceuticals fair value estimate is US$859

  • Current share price of US$448 suggests Vertex Pharmaceuticals is potentially 48% undervalued

  • Analyst price target for VRTX is US$514 which is 40% below our fair value estimate

Does the November share price for Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Vertex Pharmaceuticals

The Calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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, 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

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF ($, Millions)

US$4.76b

US$5.46b

US$6.15b

US$7.16b

US$7.89b

US$8.51b

US$9.05b

US$9.52b

US$9.95b

US$10.3b

Growth Rate Estimate Source

Analyst x8

Analyst x8

Analyst x7

Analyst x7

Est @ 10.19%

Est @ 7.92%

Est @ 6.33%

Est @ 5.22%

Est @ 4.44%

Est @ 3.89%

Present Value ($, Millions) Discounted @ 6.1%

US$4.5k

US$4.8k

US$5.1k

US$5.6k

US$5.9k

US$6.0k

US$6.0k

US$5.9k

US$5.8k

US$5.7k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$55b

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