Beauty Health Company’s (NASDAQ: SKIN ) Internal Calculations Suggest It’s 24% Undervalued

In this article, we’ll estimate the intrinsic value of Beauty Health Company (NASDAQ: SKIN ) by projecting its future cash flows and then discounting them to today’s value. This will be done using a discounted cash flow (DCF) model. Believe it or not, it’s not that hard to understand, as you’ll see from our example!

But remember, there are many ways to estimate the value of a company, and DCF is just one of them. Anyone interested in learning more about intrinsic value should read the Simply Wall St Analysis Model.

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We will use a two-stage DCF model, which, as the name suggests, considers two growth stages. The first phase is usually a period of higher growth, with the final value captured in the second “steady growth” period leveling off. First, we need to estimate the cash flows for the next ten years. Where possible, we use analysts’ estimates, but when these are not available, we extrapolate prior free cash flow (FCF) based on the last estimate or reported value. We assume that companies with contracting free cash flow will contract at a slower rate, while companies with growing free cash flow will experience slower growth rates over the period. We do this to reflect that growth tends to slow more in earlier years than in later years.

Usually we assume that a dollar today is worth more than a dollar in the future, 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

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Leveraged Free Cash Flow ($, Millions) $31.2 million $56.2 million $77.2 million $97.8 million $116.7 million $133.2 million $147.2 million $158.8 million $168.6 million $176.8 million
Sources of Growth Rate Estimates Analyst x2 Analyst x2 estimated @ 37.36% estimated @ 26.74% estimated @ 19.31% estimated @ 14.11% estimated @ 10.47% estimated @ 7.93% estimated @ 6.14% estimated @ 4.89%
Present value (millions of dollars) discounted @ 8.1% $28.9 $48.1 $61.2 $71.8 $79.2 $83.7 $85.5 $85.4 $83.9 $81.5

(“Est” = Simply Wall St estimated FCF growth rate)
10-Year Present Value of Cash Flows (PVCF) = $709 million

We now need to calculate the terminal value, which represents all future cash flows after this decade. For a number of reasons, very conservative growth rates are used that cannot exceed a country’s GDP growth rate. In this case, we use the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. As with the 10-year “growth” period, we discount future cash flows to today’s value using a cost of equity of 8.1%.

Future Value (TV)= free cash flow2032 × (1 + g) ÷ (r – g) = $177 million × (1 + 2.0%) ÷ (8.1%– 2.0%) = $3.0b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= $3.0 b÷ ( 1 + 8.1%)10= $1.4

The total value is the sum of the cash flows over the next ten years plus the discounted future value to get the total equity value, in this case $2.1b. To get intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of $11.0, the company’s valuation appears to be slightly undervalued by 24% from where it is currently trading. Assumptions in any calculation can have a big impact on valuations, so it’s best to treat them as rough estimates rather than down to the last penny.

NasdaqCM: SKIN Discounted Cash Flow December 5, 2022


We would like to point out that the most important inputs to discounting cash flows are the discount rate and of course the actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculations yourself and check your own assumptions. The DCF also does not take into account the likely cyclicality of the industry or the future capital requirements of the company, so it does not give the full picture of the company’s potential performance. Given that we view Beauty Health as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) accounting for debt. In this calculation, we used 8.1%, which is based on a leveraged beta of 1.185. Beta is a measure of a stock’s volatility relative to the overall market. Our beta is derived from the industry average beta of globally comparable companies, limited between 0.8 and 2.0, which is a reasonable range for a stable business.


While important, DCF calculations shouldn’t be the only metric you look at when researching a company. The DCF model is not the be all and end all of investment valuation. Rather, it should be viewed as a guide to “what assumptions need to hold for this stock to be undervalued/overvalued?” For example, if terminal value growth rates were adjusted slightly, it could change the overall results significantly. Why is intrinsic value higher than the current share price? For Beauty Health, we’ve rounded up three important items you should check further:

  1. risk: You should know 1 Beauty Health Warning Sign We found out before considering investing in the company.
  2. future earnings: How does SKIN’s growth rate compare to its peers and the wider market? Gain insight into analyst consensus numbers for the next few years by interacting with our free analyst growth expectations chart.
  3. Other High Quality Alternatives: Do you like a good all-rounder? Browse our interactive list of premium stocks to see what else you might be missing!

postscript. Simply Wall St updates its DCF calculations for every US stock on a daily basis, so if you want to know the intrinsic value of any other stock, just search here.

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This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.

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