Can SMS (TSE:2175) Stay Cheap After A 69% Run?
SMS stock has delivered a strong 68.5% return year to date, while both the Discounted Cash Flow (DCF) intrinsic value estimate and the market multiples currently point to the shares trading on the cheap side rather than at a premium.
- The 68.5% gain year to date suggests SMS has already re-rated sharply. However, valuation models still see room between the current share price and the intrinsic value estimate.
- Future cash flow growth and the timing of that cash generation can support the current valuation, while any setback in execution or weaker profitability would quickly test how much undervaluation is really in the price.
- On Simply Wall St's broader checks, SMS screens as undervalued in 3 of 6 areas. This is a mixed picture rather than a clear bargain or clear overvaluation, and that is captured in its 3 out of 6 value score.
The issue now is whether SMS's current share price already reflects most of that perceived undervaluation or if investors are still being offered a genuine discount to intrinsic value.
Find out why SMS' 44.0% return over the last year is lagging behind its peers.
Is SMS Still Cheap on Cash Flow?
The Discounted Cash Flow (DCF) model used here values SMS by projecting future free cash flows and discounting them back to today. For SMS, the latest twelve month free cash flow is about ¥4.7b, and the model assumes these cash flows continue to grow rather than contract over time.
On that basis, the 2 Stage Free Cash Flow to Equity model points to an estimated intrinsic value of about ¥3,396 per share. Compared with the current share price, this implies roughly a 33.0% discount. That gap suggests the market is pricing SMS below what its current and projected cash generation support, although the result remains sensitive to how these future cash flows actually develop.
Overall, the DCF analysis indicates that SMS currently appears undervalued relative to its projected cash flows.
Our Discounted Cash Flow (DCF) analysis suggests SMS is undervalued by 33.0%. Track this in your watchlist or portfolio, or discover 24 more high quality undervalued stocks.
Is SMS a Bargain on Sales?
The P/S ratio is a useful cross check for SMS because revenue is less affected by accounting choices than earnings. SMS currently trades on a P/S of about 2.8x, compared with an industry average of roughly 0.9x and a peer group average near 2.5x.
The valuation model that adjusts for SMS's size, margins and risks suggests a fair P/S closer to 4.2x. That level is above both the current multiple and the peer and industry benchmarks. The gap indicates the market is assigning a lower value to each yen of SMS revenue than this tailored fair value estimate, even after the strong year to date share price move.
On this P/S measure, SMS stock appears undervalued relative to what the model indicates would be a fair revenue multiple.
See what the numbers say about this price — find out in our valuation breakdown.
The SMS Narrative: What Would Justify Today's Price?
Simply Wall St Narratives build on the valuation work already completed for SMS and outline what kind of future growth, margins and earnings would need to occur for the stock to be worth significantly more or less than it is today. Each narrative links a fair value estimate to a specific story about SMS' potential catalysts and key risks, so you can track over time which version of events appears closest to reality on the Community page.
Share a narrative on SMS' valuation and prospects to add your voice to the Simply Wall St community and present a clear, number driven case on where its growth, margins and execution go from here.
Do you think there's more to the story for SMS? Head over to our Community to see what others are saying!
The Bottom Line
For SMS, both the Discounted Cash Flow (DCF) intrinsic value estimate and the revenue multiple work in the same direction and point to an undervalued stock rather than a stretched one. The broader checks remain mixed though, so the case is not a straightforward bargain and still rests on how SMS converts its current business into sustained cash generation.
The real dividing line between the bull and bear views is whether SMS can deliver the cash flows and profitability that the intrinsic value model assumes. If that execution holds up, today’s discount can appear justified. If it slips, the perceived undervaluation can close quickly.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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