ATLASDiscounted cash flow (DCF)
Investing glossary · Valuation and fundamentals
A valuation method that adds up a company's expected future cash flows, each shrunk to its value today.
Definition
A discounted cash flow (DCF) model values a business by forecasting the cash it will produce in the coming years and then "discounting" each amount back to today. Discounting reflects that money received later is worth less than money in hand: a dollar next year is worth less than a dollar now, because you could invest today's dollar and earn a return.
Because most of a company's life lies beyond any forecast, a DCF adds a terminal value for all the years after the last one. That makes the result very sensitive to two inputs: the growth rate and the discount rate. A small change in either moves the answer a lot, which is why a DCF is best read as a range.
Formula
V = FCF₁/(1+r) + FCF₂/(1+r)² + … + TV/(1+r)ⁿ, TV = FCFₙ·(1+g)/(r−g)
FCF = free cash flow in each year, r = discount rate, g = long-run growth rate of cash flow, TV = terminal value, n = last forecast year.
Worked example
NVIDIA (NVDA) generated $41.8B of free cash flow over the last twelve months, which is 0.8% of its market value of $5.5T. ATLAS's fair value estimate for the stock is $155.16 per share; a DCF is the step that turns cash flows like these into a single value per share.
A high free cash flow yield with a fair value above the price is the pattern a DCF tends to flag as cheap; a low yield needs strong growth to justify the price.
How ATLAS uses it
DCF is one of the two engines behind ATLAS fair values, alongside peer multiples. The stock page tells you whether a value came from a DCF, from multiples or from a blend of both.
Related in ATLAS: Valuation and targets →Browse all ATLAS tools →See it on a real stock
The example above uses these companies. Open their pages for the full numbers:
Frequently asked questions
What is a good discount rate for a DCF?
It should reflect the return an investor could expect from an investment of similar risk. For listed companies, analysts often start from the risk-free rate and add a premium for equity risk, then adjust for the company's own risk. Because the answer is sensitive to it, good practice is to test several rates.
Why do two analysts get different DCF values for the same company?
Because the forecasts, the growth assumptions and the discount rate are judgments. The mechanics are the same; the inputs are not. That is why ATLAS shows a range and a confidence level, not only one number.
Related terms
Put the idea to work on your own stocks
Open any company in ATLAS to see its fair value, its odds of rising and its risk numbers side by side.
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