Valuation
Discounted Cash Flow (DCF)
A discounted cash flow values a business as the present value of the cash it is expected to produce.
A DCF does not start from a peer multiple. It starts from a forecast of free cash flow, a discount rate that reflects the risk of those cash flows, and a terminal value for the years beyond the explicit forecast. Bring those back to today and you have an estimate of what the firm, or the equity, is worth. The gap versus the market price is the implied margin of safety or the implied optimism.
Small changes in the discount rate or the terminal growth rate move the answer a lot. That sensitivity is the point, not a bug. On Stocklytics, use the live price, the trailing cash generation you can see, and the forward P/E as a check on whether your DCF is assuming a future the market has already priced. A model that needs heroic growth to match the quote is a model asking you to be a hero.
Formula
Value = Σ (expected free cash flow in year t) ÷ (1 + discount rate) ^ t, plus a terminal value
Live example
Apple Inc. (AAPL) last printed at $345.33 with a market cap of $5.04T. Apply the formula on this page to that live price. Where the quote is missing an input, the stock page's financials are the next place to read it.
Related
WACC · Free Cash Flow · Analyst Forecast
See it on a list: best stocks · screener
Questions
Is the DCF the true value?
It is a value conditional on your assumptions. Two honest analysts get two honest answers. The useful output is which assumption the price depends on.
Equity DCF or firm DCF?
Forecasting free cash flow to the firm and subtracting net debt gives equity value. Forecasting cash flow to equity discounts a different stream at the cost of equity. Do not mix them.