DCF Analysis Explained: Intrinsic Value from First Principles
A plain-English guide to discounted cash flow (DCF) analysis — how to estimate a stock’s intrinsic value from future cash flows, the discount rate (WACC), terminal value, and enterprise vs. equity value.
The big idea: a dollar later is worth less than a dollar now
The four steps of a DCF
Step 1: Project free cash flow
Step 2: Choose a discount rate (WACC)
Step 3: Terminal value
Step 4: From enterprise value to a price per share
The reverse DCF: let the market tell you its assumptions
Common DCF pitfalls
Common questions about DCF analysis
Try it on a stock: Apple Inc. (AAPL) · MICROSOFT CORP (MSFT) · Alphabet Inc. (GOOGL) · NVIDIA CORP (NVDA) · AMAZON COM INC (AMZN) · Tesla, Inc. (TSLA) · Meta Platforms, Inc. (META)
Frequently asked questions
What is DCF analysis in simple terms?
Discounted cash flow analysis estimates what a company is worth today by projecting the cash it will generate in the future and discounting that cash back to the present. A dollar earned ten years from now is worth less than a dollar today, and the discount rate captures that.
What discount rate should I use in a DCF?
The standard choice is the company’s weighted average cost of capital (WACC). As a shortcut, use the annual return you would demand for the risk — roughly 8% for a stable business and 12% or more for a riskier one — and test a range rather than trusting a single number.
Why is DCF so sensitive to assumptions?
Most of a DCF’s value comes from cash flows years in the future plus the terminal value, so small changes in the growth rate or discount rate compound into large swings. Always run bull, base and bear scenarios instead of quoting one fair value.