DCF
Discounted Cash Flows
A company valuation method that converts future cash flows into their present-day value.
What it is
DCF (Discounted Cash Flow) is a fundamental valuation method. It says: a company is worth today as much as all its future cash flows (FCF) are worth in today's money.
Formula: Each future FCF is divided by the discount rate (WACC) and summed, plus the discounted terminal value.
The result = intrinsic value per share, which is compared against the market price.
Key inputs:
- →Revenue and FCF margin projections (typically 10 years)
- →WACC (discount rate)
- →Terminal growth rate (beyond year 10)
Why track it
DCF forces the investor to think through specific assumptions about a company's future — unlike relative valuation (P/E, EV/EBITDA), which only says "how expensive is this company compared to others."
A three-scenario DCF (bull/base/bear) shows the range of probable values and helps estimate the risk/reward asymmetry.
Real-world example
Microsoft (April 2026):
- →Base: WACC 9%, FCF margin 33–36%, terminal growth 3% → $376/share (≈ market price)
- →Bull: WACC 8.5%, FCF margin 35–41%, terminal growth 3.5% → $610/share (+60%)
- →Bear: WACC 9.5%, FCF margin 27–30%, terminal growth 2.5% → $168/share (-56%)
Watch out for
DCF is extremely sensitive to input assumptions — especially WACC and terminal value. A 0.5% change in WACC can shift the resulting price by 15–20%. Always run a sensitivity analysis and work with multiple scenarios.
Sensitivity Analysis: A table with WACC on one axis (±0.5% steps) and terminal growth on the other (±0.5% steps), with the resulting intrinsic value in each cell. It shows how robust your conclusion is — if the valuation varies dramatically in every cell, the assumptions are too uncertain for the conclusion to be reliable.
Reverse DCF: Instead of projecting FCF into the future, ask the inverse — what FCF growth rate must the company achieve for the current market price to make sense? If you find that the market is implicitly assuming 25% annual FCF growth for 10 years, but the company has historically grown at 10%, the valuation is clearly optimistic. Reverse DCF is a quick way to check whether market expectations are realistic.
“Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.”