Is Squarespace undervalued compared to its fair value?

While the stock market sets a "price" for a company, this price will often be affected by a wide range of factors, some of which may not impact the true worth, or fair value, of the company. By comparing the market price to the fair value of a company, or a set of companies or indices, investors can determine whether a company's shares are potentially over-or undervalued. There are many methods which can be used to determine the fair value of a company: Discounted Cash Flow (DCF), relative valuation, Dividend Discount Model (DDM), and more. First, 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.

Discounted Cash Flows (DCF)

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.