Keysight Technologies, Inc.KEYSNYSE

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DCF Valuation

DCF Valuation Summary

Strong Sell

Fair Value: $207.91 per share(market-calibrated)

-30.9%

Upside to Fair Value

Current

$300.92

Pure Model

$176.90

Fair Value

$207.91

Bull Case

$226.41

Bear Case

$134.15

Market Reality Check

Model Terminal Growth

3.75%

Market-Implied Growth

Unreachable

Calibrated Growth

75/25 blend

Market price implies assumptions beyond model range. Fair value blends 75% model / 25% market price.

What's Driving This Ratingfor KEYS

✓

CapEx already efficient

CapEx at 3.11% of revenue is already at or below sector maintenance level. No normalization needed — cash conversion is already strong.

↑

Margin expansion modeled

Current EBIT margin is 22.78% — below the sector mature average of 25.00%. Model expands margins as the business scales and operating leverage kicks in. Year 10 EBIT reaches $2.3B (24.42% margin).

⚠

Analyst growth decelerates sharply

Revenue growth drops from 22.94% in Year 1 to 3.75% by Year 5 (per analyst consensus). This growth deceleration is a key reason the model may undervalue the stock if growth re-accelerates.

↔

Perpetuity and exit methods disagree

Perpetuity growth gives $130.34/share (19.0x terminal FCF) while exit multiple gives $223.47/share (40.1x terminal FCF). The 28x EV/EBITDA exit reflects current market multiples, while the perpetuity method with 3.75% growth is more conservative. The base case averages both methods.

⚠

Market price exceeds model's maximum

Even with the most optimistic terminal growth the model allows, it can't reach $300.92. The market is pricing in factors beyond the DCF framework — possibly optionality, brand premium, or expectations of margin/growth inflection not yet in analyst estimates.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 69.84% indicates efficient cash generation. FCF reaches $1.8B by Year 10 (19.61% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)1.14

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)9.62%

Cost of Debt

Pre-tax Cost of Debt2.80%

Tax Rate19.69%

After-tax Cost of Debt2.25%

Equity Weight (E/V)94.60%

Debt Weight (D/V)5.40%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (94.60% × 9.62%) + (5.40% × 2.25%)

= 9.22%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$6.6B	$7.5B	$7.8B	$8.4B	$9.4B
EBIT	$1.5B	$1.7B	$1.8B	$2.0B	$2.3B
Tax	$296M	$338M	$357M	$395M	$452M
NOPAT	$1.2B	$1.4B	$1.5B	$1.6B	$1.8B
+ Depreciation	$242M	$276M	$286M	$308M	$344M
- Capex	$206M	$235M	$243M	$262M	$293M
- Δ NWC	$187M	$63M	$43M	$46M	$52M
Free Cash Flow	$1.1B	$1.4B	$1.5B	$1.6B	$1.8B
Discount Factor	0.916	0.768	0.643	0.539	0.414
Present Value	$969M	$1.0B	$938M	$870M	$763M

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$1.8B

Terminal Growth Rate3.75%

WACC9.22%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$35.0B

PV of Terminal Value$14.5B

Exit Multiple Method

Year 10 EBITDA$2.6B

Exit Multiple (EV/EBITDA)28.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$73.9B

PV of Terminal Value$30.6B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$9.2B

PV of Terminal Value$14.5B

Enterprise Value$23.6B

(-) Net Debt$1.1B

Equity Value$22.5B

Shares Outstanding173M

Price per Share$130.34

Exit Multiple Method

PV of Projected FCFs$9.2B

PV of Terminal Value$30.6B

Enterprise Value$39.8B

(-) Net Debt$1.1B

Equity Value$38.7B

Shares Outstanding173M

Price per Share$223.47

Pure Model Fair Value

$176.90

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	2.75%	3.25%	3.75%	4.25%	4.75%
7.22%	$219.45	$227.47	$237.80	$251.60	$271.00
8.22%	$191.63	$196.45	$202.34	$209.71	$219.21
9.22%	$170.10	$173.21	$176.90	$181.33	$186.75
10.22%	$152.62	$154.75	$157.21	$160.08	$163.48
11.22%	$137.99	$139.50	$141.22	$143.19	$145.46

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$134.15

-55.4% vs current

• -25% vs analyst consensus
• Terminal growth: 3.3%
• Beta: 1.42

Base Case

$176.90

-41.2% vs current

• Analyst consensus
• Terminal growth: 3.8%
• Beta: 1.14

Bull Case

$226.41

-24.8% vs current

• +25% vs analyst consensus
• Terminal growth: 4.3%
• Beta: 0.97

Key Assumptions & Drivers• Technology Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth22.94%

Year 3 Revenue Growth5.82%

Year 5 Revenue Growth3.75%

Year 7 Revenue Growth3.75%

Year 10 Revenue Growth3.75%

Terminal Growth Rate3.75%

Margin & Efficiency

Current EBIT Margin22.78%

Terminal EBIT Margin25.00%

Tax Rate19.69%

Historical Capex / Rev3.11%

NWC / Revenue15.20%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 28x EV/EBITDA (Technology sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

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