How Much is Gamehost Worth Today?What is intrinsic value?
Intrinsic value is an estimate of all future cash flows – in and out – that the business will generate over its remaining life, discounted to the present value, using the appropriate interest rate. If you knew with precision, the above variables, intrinsic value would be the true and undisputed value of GH.
Nobody knows the precise amount of the net cash flows that the Company will generate over its remaining life and so intrinsic value is an estimate. Since these net cash flows cannot be precisely known, it would be foolish to work with precise numbers and therefore a range of estimates is by far the better way to approach the issue.
More often than not, the range of the estimate is so wide that it is totally useless in helping an investor make an investment decision. However, from time to time, even very conservative estimates of the discounted future net cash flows will indicate that a stock is trading below this range of value.
No investor, Warren Buffett included, can estimate intrinsic value for every company. First, you need to be able to identify if the company has a durable competitive advantage. The duration is crucial. Second, you need to have a very good understanding of the business economics of the company. Third, the company needs to be predictable. Most businesses will not meet all three criteria and so an intelligent investor will not attempt to value them.
A quick word about competitive advantage. A company’s competitive advantage is so important to protect and preferably to widen. If it weakens, it will have a direct impact on the future net cash flows and the company will become less valuable. If it strengthens, future net cash flows will be bigger and the company becomes more valuable.
Weakening competitive advantage – lower stock price. Strengthening competitive advantage – higher stock price.
A competitive advantage is continuously getting stronger or weaker – every second of every day. Of course, you don’t notice it on a second-by-second timeframe, but it is indeed constantly changing. Every time TheBridge sees a clean casino, the advantage is getting bigger. Every time Kasking sits down to a properly served steak diner at the Deerfoot, the advantage gets bigger. When a patron is treated in a rude fashion by a casino worker, the competitive advantage gets narrower. Each customer experience either widens or narrows the competitive advantage.
An investor cannot possibly notice and keep tabs on all of this but over time they will have a very big impact on the competitive advantage, intrinsic value and stock price.
I’m sure that none of you have ever heard of Sir David Brailsford:
Sir David turned the British cycling team into an unstoppable force in the Beijing and London Olympics and used the term “the aggregations of marginal gains”.
Those triumphs stemmed not from one major innovation, but a multitude of minor improvements, which combined to create a crushing advantage. Example, Brailsford’s cyclists raced on wheels rubbed with alcohol to enhance their grip. They wore electrically heated over-shorts to maintain the right temperature for their muscles.
They studied how surgeons washed their hands to reduce the risk of illness. They even brought their won pillows on trips so they were more likely to sleep well.
“It struck me that we should think small, not big, and adopt a philosophy of continuous improvement through the aggregation of marginal gains. Forget about perfection; focus on progression, and compound the improvements” – Sir David Brailsford
It is not only the big things that impact a competitive advantage but the tiny things that add up over time.
In GH we are blessed with a very simple and predictable business. It has a consistent operating history and a durable competitive advantage.
I would estimate that the value of GH today is between $13.00 - $14.86.
Now, that would be my estimate of GH’s value. As you can see it is well above the current stock price of approximately $8.66 and implies a gain of between 50% – 72% from $8.66.
What we also have to consider is if GH should indeed trade in the market in this price range or not. A rational investor will likely not pay $13.00 - $14.86, even though they may not disagree with the estimate. The markets concern would be on future growth and not seeing a large enough amount of it. The market will very likely attribute a discount to this valuation – these are the realities of how the stock market operates.
From 2011 to 2019, GH has generated $202,952,990 in free cash flow (I do make adjustments to the reported figures in the financial statements) or the equivalent of $8.55 per share based on average shares outstanding.
It has paid out $7.237 per share in dividends during this period and based on average shares outstanding would equal $171,789,480.
A useful metric to gauge management's capital allocation skills, the acceptance by the market and desirability of GH's stock, is to see if the Company has produced at least $1.00 of gain in market value for every $1.00 of retained earnings. So over time, you would want to see a company increase its stock price by at least $15 if the cumulative retained earnings have been $15 per share. This shows the level of acceptance of a company's management by the market, the anticipation of future results and the desirability of owning its shares.
From 2011 to 2019, GH has retained $31,163,510 in free cash flow (again adjustments have been made) or the equivalent of $1.31 per share. The market price of the stock started the period at $10.24 and ended the period at $8.48 for a decrease of $1.76. If GH retained a cumulative amount of $1.31 you would want to see the stock price higher by at least $1.31 - irrespective of the amount of dividends that were received. The market is not interested in giving GH its proper valuation - this will no doubt continue if growth does improve going forward. The market wants to see sustainably higher levels of growth and until that happens, GH will be capped at a certain valuation.
I myself believe in GH and have increased my position in it very recently. While the market will cap the valuation of GH – nobody can tell you by how much but a 10% - 15% discount to intrinsic value would be a reasonable guess in my view – it still represents a solid return from the current stock price.
It is not impossible for GH to grow at a faster pace. If the market were to see concrete attempts at growth, it would start to eliminate the discount to value that we currently have.
In a future post I’ll examine one simple way that faster and sustainable growth can be achieved and with past data for it to hopefully be a useful exercise.
With stronger future growth or not, GH is undervalued at $8.66.