Simplywall.st shows that Sony is highly overvalued. However, Sony has a PE Ratio (TTM) 23.31 on Finance.yahoo.com so I did look into their reasoning. I couldn't understand it. Could someone explain this reasoning: https://simplywall.st/stocks/jp/consumer-durables/tse-6758/sony-shares#valuation Click on "View Data" on a Fair Value field. --- Below are the data sources, inputs and calculation used to determine the intrinsic value for Sony. TSE:6758 Discounted Cash Flow Data Sources Data Point Source Value Valuation Model 2 Stage Free Cash Flow to Equity Levered Free Cash Flow Average of 22 Analyst Estimates (S&P Global) See below Discount Rate (Cost of Equity) See below 8.1% Perpetual Growth Rate 5-Year Average of JP Long-Term Govt Bond Rate 0% An important part of a discounted cash flow is the discount rate, below we explain how it has been calculated. Calculation of Discount Rate/ Cost of Equity for TSE:6758 Data Point Calculation/ Source Result Risk-Free Rate 5-Year Average of JP Long-Term Govt Bond Rate 0% Equity Risk Premium S&P Global 6.3% Consumer Durables Unlevered Beta Simply Wall St/ S&P Global 1.26 Re-levered Beta = 0.33 + [(0.66 * Unlevered beta) * (1 + (1 - tax rate) (Debt/Market Equity))] = 0.33 + [(0.66 * 1.264) * (1 + (1 - 30.9%) (19.26%))] 1.289 Levered Beta Levered Beta limited to 0.8 to 2.0 (practical range for a stable firm) 1.289 Discount Rate/ Cost of Equity = Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium) = 0% + (1.289 * 6.26%) 8.07% Discounted Cash Flow Calculation for TSE:6758 using 2 Stage Free Cash Flow to Equity The calculations below outline how an intrinsic value for Sony is arrived at by discounting future cash flows to their present value using the 2 stage method. We use analyst's estimates of cash flows going forward 10 years for the 1st stage, the 2nd stage assumes the company grows at a stable rate into perpetuity. TSE:6758 DCF 1st Stage: Next 10 years cash flow forecast Levered FCF (JPY, Millions) Source Present Value Discounted (@ 8.07%) 2021 28,350 Analyst x2 26,232.75 2022 156,000 Analyst x3 133,569.09 2023 262,300 Analyst x4 207,811.88 2024 417,200 Analyst x3 305,849 2025 538,433.33 Analyst x3 365,245.94 2026 626,464.67 Est @ 16.35% 393,224.64 2027 698,161.5 Est @ 11.44% 405,499.88 2028 754,093.1 Est @ 8.01% 405,275.64 2029 796,381.81 Est @ 5.61% 396,038.63 2030 827,643.96 Est @ 3.93% 380,846.93 Present value of next 10 years cash flows ¥3,019,594 TSE:6758 DCF 2nd Stage: Terminal Value Calculation Result Terminal Value FCF2030 × (1 + g) ÷ (Discount Rate – g) = ¥827,643.961 x (1 + 0%) ÷ (8.07% - 0% ) ¥10,254,496.57 Present Value of Terminal Value = Terminal Value ÷ (1 + r)10 ¥10,254,497 ÷ (1 + 8.07%)10 ¥4,718,687.92 TSE:6758 Total Equity Value Calculation Result Total Equity Value = Present value of next 10 years cash flows + Terminal Value = ¥3,019,594 + ¥4,718,688 ¥7,738,281.92 Equity Value per Share (JPY) = Total value / Shares Outstanding = ¥7,738,282 / 1,236 ¥6,258.78 TSE:6758 Discount to Share Price Calculation Result Value per share (JPY) From above. ¥6258.78 Current discount Discount to share price of ¥11650 = (¥6258.78 - ¥11650) / ¥6258.78 -86.1% Learn more about our DCF calculations in Simply Wall St’s analysis model.
Automated valuation models = garbage. Current price reflects market estimate equilibrium. So valuing a stock using consensus data does not make sense. Instead, you want to test scenarios (e.g. consensus is 15% growth but you think it’s 22% — what does that translate in stock price terms?).
I don't know much about the company but I would guess a lot of their future earnings would have to do with Playstation 5 sales and their game sales. The future is unknowable so focus on current earnings and ride the uptrend until a bad earnings miss.