Terminal Value For Stocks EXPLAINED (Top 3 Methods)

★Learn How I Analyse Businesses For Consistent Stock Market Returns★

In this video I explain how to calculate terminal value for stock market investments. Terminal value is a key component of estimating the future cash flows of a business and there are a few ways that you can approach it.

Here I share the 3 major methods for calculating terminal value for a stock.

Check out this video below on the Time Value Of Money for those who are new to understanding discounted cash flows

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Disclaimer:
The information in this video is general information only and should not be taken as constituting professional advice from Hamish Hodder.
Hamish Hodder is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances.
Hamish Hodder is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this video.

[leestringer]

Thanks so much. I watched a half dozen videos, but yours is the first that explained TV in terms that I can understand.

[vinniejackson]

Long informative videos are a great thing. If someone doesnt have the patience to listen and learn, they hardly deserve to reap the rewards.
Epic video my friend, please keep them coming! :)

[aaronlewis]

Incredible video, you have really impacted my investing journey by setting me on the right path from day one. Because of you I have avoided so many pitfalls for rookie investors and have learned more than I could have ever imagined. God bless you Hamish, you are the best investing channel on youtube by a mile

[sachastayswi]

The video I have been waiting for. Thanks Hamish.

[falvarezreynolds]

Thanks Hamish! It's very difficult to find this kind of videos. You give me the answer to my question about WACC. Can you record a video with some book recommendation?

[moheuddin_sehab]

Finally... Terminal value. Thank you so much

[mike]

Once again, you cut through all the bullshit and get to the meat of it! Thank you sir

[yijencheng]

wow came across this video and it's absolutely amazing! Just curious how are these three formula deducted? would be extremely helpful!

[arckimede]

Hi, I would really like to use your spreadsheet too but many features don't work and I don't understand why. Could anyone help me out? Thank you

[lord]

Your content is so helpful. Thank you Hamish

[nickhaarlem]

Thanks a lot for the valuable informatie. Very helpful indeed. What does it mean if the cashflow exceeds the net income? I have a company that has mostly 0 capex spending. The PE ratio is 12, but if I use your sheet and calculate cashflow growth, the buy price looks very good. Is it possible to suggest stocks to you? Kind regards

[aamir]

Absolute pleasure, your videos are amazing. I completely agree that CAPM model is too difficult to calculate a discount rate, I always advise my client's as business valuer to use a number depending on the business trade and CF slopes.

[thprodigy]

Thank you for the spreadsheet!

What if the company has negative cash flow? and what do we need to do in order to estimate a reasonable positive cash flow for DCF to work?

[leoscalia]

Great video! Super interesting! Please keep up the good work Hamish!

[aaroncarlisle]

Brilliant video Hamish! Thanks so much for doing this! You have been officially subscribed :D

[uacapital]

Hi ...I have to ask what should we do about face value of stock? When our buy price is let's say $30 and face value is 10 and another stock has same buy price by our spreadsheet but face value is 1 what should we do? Should we always consider face value 1?

[srabansinha]

Hello ! :)

(a) In the Second and Third Method of Estimating Terminal Value, You Used a Perpetuity/Perpetuity Growth Formula to Asses the present value ( at the Tenth Year ) of a Sequence of Cashflows ( i.e., the Series of 10th year cash flows without any Growth into infinity or With a Growth Rate "G" assumed ) by using a discount factor, Say "Z" .

(b) Next you discounted back the same Estimate to present day by using present day risk free Interest rates, Say "P".


I couldn't Understand the part about the discount rate, "Z", which you used to Estimate the perpetuity value at the tenth year .

(Question)》Where and/Or How would I Get or estimate that rate "Z" ??


Thank You :)

[angelpeng]

No one on the internet explains it like you do. Can you please make more company analysis videos?

[ArvindBhave]

Very thorough.
But over the past year you seem to have changed your method of calculating buy price.
Can you teach us what made you change your thinking?

[MrBlackjack]

In this YouTube video, the creator discusses the concept of terminal value and its significance in intrinsic value calculations for stock market investments. The key points and takeaways from the video are as follows:

1. **Introduction to Terminal Value**: Terminal value is a crucial component in estimating the intrinsic value of a business. It helps determine the future cash flows a business can generate beyond a specified growth period, which is typically ten years in the creator's analysis.

2. **Purpose of Terminal Value**: Terminal value is essential for assessing the total future cash flows a business will produce over its entire remaining life. This is significant because intrinsic value is the sum of all these future cash flows, discounted at an appropriate rate.

3. **Two-Step Calculation**: Intrinsic value calculations involve two steps: the growth period (typically ten years) and the terminal value. During the growth period, estimated growth rates for cash flows are applied.

4. **Common Terminal Value Approach**: The most common approach used for terminal value in stock market investments is the "exit multiple terminal value." This method involves adding a multiple (e.g., 10x) to the cash flow or earnings in the tenth year, assuming the business can be sold for that multiple at the end of the growth period.

5. **Flaws of Exit Multiple Terminal Value**: The creator highlights two major flaws in the exit multiple approach:
- It shifts from analyzing future cash flows to relative analysis, comparing multiples across businesses in an industry.
- The choice of a fixed multiple (e.g., 10x) is arbitrary and may not suit all businesses, as some will continue growing, while others won't.

6. **Perpetuity Terminal Value**: The creator recommends using a perpetuity terminal value method, assuming no growth beyond the growth period. The formula for this method is straightforward: divide the tenth year cash flow by the discount rate (required rate of return or risk-free rate) to calculate future value and then discount it back to the present.

7. **Benefits of Perpetuity Terminal Value**: This method is more conservative, assuming that a business continues producing cash flows but doesn't grow after the growth period. It aligns with a value investor's approach to analyzing businesses.

8. **Calculation Example**: The creator demonstrates how to calculate the terminal value using the perpetuity terminal value formula and how it contributes to the intrinsic value or buy price of a stock.

By understanding the concept of terminal value and opting for a perpetuity terminal value approach, investors can make more informed decisions about the value of a business, considering its long-term cash flow potential.