Are MetaHero Identities Undervalued? A Discounted Cash Flow Approach
Summary
I use a discounted cash flow (DCF) model to valuate the net present value of future $POW cash flows from staking a MetaHero Identity. This article assumes basic understanding of the Pixel Vault ecosystem (see this in-depth video for more information).
Calculating the net present value (NPV) of all future $POW staking rewards for each $POW price scenario yields a fair market value of 5.85 ETH for a MetaHero Generative Identities NFT:
My model predicts that MetaHero Identity NFTs are currently undervalued with an OpenSea floor price of 4.65 ETH as of 2/10/2022.
I do not account for future additional utility benefits such as a Mint Pass #2 claim or previous planet giveaways. In addition, this valuation is purely based off of the revenues earned staking $POW. Variables such as scarcity (demand), brand (awareness), collaborations, additional venture capital funding, and AAA game P2E release have the capability of boosting the value of a MetaHero NFT beyond the base value of staking returns.
I assume the following assumptions:
- 18% discount rate
- Staking rewards of 4,150 $POW per month for 12 months (assuming MetaHero Identities continue to earn $POW rewards for an additional 6-months)
- Four $POW price scenarios of ultra-bullish, bullish, stagnant, bearish, corresponding to the probabilities of 10%, 45%, 40%, 5%, respectively
- ETH price of $3,100
- Starting February $POW price of $0.25
Note: I am Pixel Vault believer and give a 55% probability of a bull-market and a 45% probability to a stagnant/bear market.
The remainder of this article goes into detail on how I build my DCF model and assumptions.
I will try to post a new Pixel Vault analysis each week to provide new insights into the Pixel Vault world. Follow me on twitter @countnft to request any analyses you would like to see!
My DCF analysis should only be used as an additional insight to your own investment research. As investment disclosure, I currently own a MetaHero NFT and other Pixel Vault assets. Please invest at your own risk.
Brief Overview of Pixel Vault
As an NFT investor, I have always tried to find the best approach on how to model the potential value of a new NFT project. How can we translate hype and promise of utility to financial valuations? How can the community watch out for each other before rushing into minting gas wars? To hopefully add clarity in a sea of new NFTs, I try to apply the financial valuation method of a discounted cash flow model (DCF) to one of my favorite projects: Pixel Vault
For those unfamiliar, Pixel Vault is building a “decentralized Disney” empire where their NFTs will allow the community to play in an AAA on-chain P2E game (planning to launch in the next 2–3 years). Pixel Vault plans to use the MetaHero Identities NFT collection as the main characters in an ecosystem that utilizes the cryptocurrency token, $POW. $POW will act as the in-game currency, which users can earn while playing the game (see the ecosystem map I put together below and check out this video for more detail on the PV ecosystem).
So why is this important and why am I writing this article?
Pixel Vault has reserved 200 million (20%) of the $POW supply for staking (eligible for MetaHero NFTs) over a 6-month period and 600 million $POW tokens for earning while playing the game (the remaining 200 million will go to the Pixel Vault team and investors — see this $POW article for more information).
Pixel Vault has given MetaHero NFT holders the ability to stake and earn $POW over a 6-month period in addition to earning $POW from the United Planets DAO when the game launches (note that Side Kicks will be able to stake $POW but details have not been released — owning a MetaHero will enable you to claim 1x Side Kick Mint Pass for each Hero owned). Therefore, we have real revenues that allow us to valuate MetaHero NFTs. We can treat the expected staking rewards of $POW as future cash flows just like how we could valuate a business on its future predicted cash flows taking into account revenues and costs.
What is a discounted cash flow (DCF) model?
A discounted cash flow model (DCF) is a valuation method that allows us to estimate the value of an investment in present dollars based on how much money an investment is projected to earn in the future.
I have seen multiple twitter analyses on the MetaHero identities claiming that through staking you earn X per month for the next 6-months. However, this is partly inaccurate as a dollar in 6-months is not equal to a dollar today due to time. For example, if we get a 6-month interest rate of 2% for an investment, then a dollar today will be worth $1.02 after 6-months. Therefore, a DCF will discount future dollar earnings to calculate the present value of all future cash flows.
A DCF model gives us insight into how we can valuate a cash producing asset but has limitations as many assumptions are needed. Below are the two key assumptions a DCF model requires and its limitations:
Discount Rate: The discount rate represents the potential returns and risk an investment project has — a higher discount rate implies higher risk but higher returns. The discount rate is used to calculate the present value of future income. The higher the discount rate, the less $1 is worth today than in 1 year.
Limitations: Picking the correct discount rate is difficult and can change the present value of future cash flows dramatically. For example, the table below shows the difference between using a 5% or 20% discount rate on future cash flows of $1,000 a year for the next 10 years.
As you can see in the table above, using a discount rate of 5% (A) yields a present value of $7,722 of all future cash flows of $1,000 a year. Using a discount rate of 20% (B) yields a present value of $4,192 — a difference of $3,529.
Projected cash flows: Cash flow is the amount of cash a business or asset earns after accounting for all costs. The projected cash flows are the $ amount a business or asset forecasts to earn each period. How a company or analyst forecasts future cash flows varies greatly on the industry or asset. For example, one can calculate future cash flows each period as a percent increase equal to the % increase in GDP, or a set growth rate, or various sensitives such as the number of new customers acquired. Regardless of your discount rate, building an accurate assumption of your future cash flows is crucial.
Limitations: Making the correct forecasting assumptions is difficult as you are trying to predict the future. No one can expect the unexpected such as a COVID pandemic that had a drastic impact on many businesses’ cash flows.
In the next section, I outline the assumptions I used to build a DCF for valuating a MetaHero Identities NFT.
DCF Model Assumptions
Free Cash Flows: Many may ask the question — how can an NFT produce revenue, yet alone cash flows? The answer is simple: staking. Staking a MetaHero (core or identities) yields $POW each day — an amount that has a defined USD value. Therefore, assuming one stakes for the entire allotted staking period of 6 months, we have a monthly USD revenue producing asset. The more difficult assumption to answer is how many $POW tokens can we expect to receive each month.
Monthly $POW tokens received from staking: It was estimated that a MetaHero would receive ~ 1,000 $POW tokens per week. There is variance as the amount of $POW receives depends on how many other MetaHeroes are also staking (the more individuals staking the lower share you receive from the pool). Therefore, for 30 days I tracked how many $POW tokens I received: 4,132. This is below the expected average of 4,333 (1,000 x 52 / 12). To be conservative I assume that one will receive 4,150 $POW tokens per month.
Staking period: I assume that MetaHero Identities will receive 4,150 $POW tokens each month starting Feb 2022 through Feb 2023. Pixel Vault has stated that 200 million $POW tokens will be rewarded via staking for a 6-month period. So why do I apply an additional 6-months? First off, Side Kicks (the next NFT asset released from PV) will be eligible to stake and holding a MetaHero will give you access to claim a Side Kick. Second, Pixel Vault estimates that the AAA game will launch in 2–3 years. Therefore, I find it unlikely that Pixel Vault will only allocate $POW for a 6-month period. I believe Pixel Vault will reward MetaHero holders with additional staking benefits from the 600 million $POW tokens earmarked to the UPDAO ecosystem.
$POW Price: The most difficult item to forecast is the price of $POW. Pixel Vault could flop, driving the price to $0. However, Pixel Vault could create an incredible game with millions of users, driving the price of $POW to $7 or $15 (~$7 or $15 billion market cap, respectively). Additionally, Pixel Vault could deliver but the macro crypto environment could turn bearish, dragging the entire ecosystem down with it. Therefore, I model the $POW price based on four different scenarios:
(1) Ultra-Bullish: Pixel Vault delivers beyond what is expected, driving $POW to ~$5.60 or a $5.6 billion $POW market cap by end Feb 2023.
(2) Bullish: Pixel Vault delivers and creates utility for the ecosytem, driving $POW to ~$3.00 or a $3 billion $POW market cap by end Feb 2023.
(3) Stagnant: Pixel Vault delays execution and underperforms, driving $POW to ~$0.90 or a $900 million $POW market cap by end Feb 2023.
(4) Bearish: Pixel Vault fails execution and holders liquidate assets, driving $POW to ~$0.03 or a $30 million $POW market cap by end Feb 2023.
The chart below displays each scenario:
However, I apply varying degrees of probability to each price scenario in my DCFs. The following probabilities are assumed:
I give a macro bull outlook a larger likelihood of occurring (55%) than a macro stagnant/bearish outlook (45%) as I believe an incredible amount of wealth and interest is entering the Web 3.0 space. From Microsoft acquiring Activision Blizzard and citing Metaverse expansion to a16z announcing plans to raise a $4.5 billion crypto fund — the macro trend is bullish.
Discount Rate: I assume an 18% discount rate. Some may disagree that this rate is far too low considering that crypto/NFTs should be considered high risk and therefore should be treated with a discount rate above 30%. I counter with the following:
- Ryan Allis of Coinstack published a detailed DCF Valuation of Ethereum that assumes a 12% discount rate for Ethereum, which is making the rounds across Twitter and VCs (venture capital) as a standard.
- Although Pixel Vault assets have more risk than Ethereum, I classify PV as a “blue-chip” NFT class due to their recent $100 million funding.
- NFT space is booming with more established money entering the space. Examples include: (1) Polygon raising $450 million including Sequoia (2) OpenSea received $300 million in funding (3) Goldman Sachs sees Metaverse as $8 trillion opportunity.
Costs — Gas Fees: As no NFT or staking reward is free — I assume conservatively a monthly gas fee of ~0.015 ETH or ~$46 each month, decreasing 1% each month.
DCF Output
Below are the DCF outputs for each scenario:
Conclusion
We can now apply the probability assumptions for each macro $POW price scenario to calculate the fair market value of a MetaHero Generative Identities NFT:
Accounting for each probability, I calculate that a MetaHero NFT should be valued at 5.85 ETH based on the future cash flows earned by staking a MetaHero for $POW.
I recommend that MetaHero NFTs are undervalued and are a buy. This valuation does not take into account unique NFT traits or any additional utilities such as previous or future claims/pre-mints.
Thank you for taking the time to read. I am CountCrypto and I hope you enjoyed this article. Feel free to DM me on Twitter to request any additional information, suggestions, or analysis requests.
Follow me on Twitter @countnft and check back in as I’ll be releasing weekly analyses/articles on the Pixel Vault ecosystem.
