Want to learn to do a Reverse DCF in 5 minutes?
Here's how to get it done in 7️⃣ simple steps⤵️
Here's how to get it done in 7️⃣ simple steps⤵️
Before diving in, it's VITAL to understand the tool you're being given
It will spit out a VERY SPECIFIC growth rate that's implied in the stock's price.
This SPECIFICITY will lead you to be CONFIDENT in your assumptions.
IT SHOULD NOT!
It will spit out a VERY SPECIFIC growth rate that's implied in the stock's price.
This SPECIFICITY will lead you to be CONFIDENT in your assumptions.
IT SHOULD NOT!
I only recently starting using valuation again in my framework.
It will NEVER determine if I should buy/sell a stock outright.
But it will help determine POSITION SIZING.
I cannot emphasize enough how important this caveat is
It will NEVER determine if I should buy/sell a stock outright.
But it will help determine POSITION SIZING.
I cannot emphasize enough how important this caveat is
That said, let's begin by using a very simple calculator I've been using.
There are many out there, and I might change. But this is what I have for now.
To walk you through this, I'll use $AXON as my exemplar
tradebrains.in
There are many out there, and I might change. But this is what I have for now.
To walk you through this, I'll use $AXON as my exemplar
tradebrains.in
1️⃣ Collect some very basic data, including:
🟢 Current Stock Price ($198)
🟢 Free Cash Flow ($59M)
🟢 Cash & Equiv ($378M)
🟢 Debt ($0)
I can all get on Yahoo! Finance (if you want to be thorough, use SEC database)
🟢 Current Stock Price ($198)
🟢 Free Cash Flow ($59M)
🟢 Cash & Equiv ($378M)
🟢 Debt ($0)
I can all get on Yahoo! Finance (if you want to be thorough, use SEC database)
2️⃣ Find shares outstanding
This last data point most aggregators get wrong, so I use the most recent quarterly release.
$AXON's shares outstanding currently sit at 72.53 million
This last data point most aggregators get wrong, so I use the most recent quarterly release.
$AXON's shares outstanding currently sit at 72.53 million
3️⃣ Put those numbers in your calculator
It should look like this for $AXON
It should look like this for $AXON
4️⃣ Make assumptions
The hard part. Decide your:
👉Discount Rate: What type of return do you want? (simplified)
👉Last FCF multiple: How much would this trade for in 30 years?
For $AXON, I chose:
👉Disc: 11% (market beating)
👉FCF: 10 (perhaps high, but wide moat business)
The hard part. Decide your:
👉Discount Rate: What type of return do you want? (simplified)
👉Last FCF multiple: How much would this trade for in 30 years?
For $AXON, I chose:
👉Disc: 11% (market beating)
👉FCF: 10 (perhaps high, but wide moat business)
5️⃣ Enter the stock price
Leave the growth rate at 0% (this is the key variable in the REVERSE part of "reverse DCF")
Instead, scroll down and put the stock price in.
If FCF never grows again, $AXON is overpriced by 1,400%!!
Leave the growth rate at 0% (this is the key variable in the REVERSE part of "reverse DCF")
Instead, scroll down and put the stock price in.
If FCF never grows again, $AXON is overpriced by 1,400%!!
6️⃣Adjust the Growth Rate
Next, start playing with the Growth Rate so that
Intrinsic Value ↔️ Current Share Price
Next, start playing with the Growth Rate so that
Intrinsic Value ↔️ Current Share Price
For instance:
👉If $AXON grows FCF at 20% rate over next ten years
👉Stock is still overpriced by 450%
👉If $AXON grows FCF at 20% rate over next ten years
👉Stock is still overpriced by 450%
For $AXON, the growth rate needs to be 47.5%
What does that mean?
👉If I'm looking for an 11% return, $AXON needs to grow FCF by 47.5% over the next decade
What does that mean?
👉If I'm looking for an 11% return, $AXON needs to grow FCF by 47.5% over the next decade
7️⃣ Ask yourself: "IS THIS REASONABLE?"
Let's take a look at $AXON's FCF growth over the past few years.
It's impressive, but to grow at a 47.5% clip for 10 years, FCF would have to reach nearly $2 billion.
👉Could it do that? YES
👉Is it probable? NO
Let's take a look at $AXON's FCF growth over the past few years.
It's impressive, but to grow at a 47.5% clip for 10 years, FCF would have to reach nearly $2 billion.
👉Could it do that? YES
👉Is it probable? NO
Does that mean I sell ALL of my $AXON?
NO!!
This has everything I look for in an investment:
👉Mission-driven
👉Wide moat (switching costs)
👉Optionality
👉Financial Fortitude
👉No single point of failure
👉Heavily invested insiders
NO!!
This has everything I look for in an investment:
👉Mission-driven
👉Wide moat (switching costs)
👉Optionality
👉Financial Fortitude
👉No single point of failure
👉Heavily invested insiders
Here's what it DOES mean...
$AXON was nearly 12% of my portfolio.
That's a bit high given these assumptions.
So I pared it down to 9%.
If it falls later, I can use that to buy more
But I DON'T buy into the false precision of DCF and sell everything!
$AXON was nearly 12% of my portfolio.
That's a bit high given these assumptions.
So I pared it down to 9%.
If it falls later, I can use that to buy more
But I DON'T buy into the false precision of DCF and sell everything!
This is a VERY general view of how to do a reverse DCF.
But if you found it helpful, give me a follow @Brian_Stoffel_
And if you want to understand the CONTEXT for how to apply this to investing, sign up for my FREE weekly newsletter
brianstoffel.com
But if you found it helpful, give me a follow @Brian_Stoffel_
And if you want to understand the CONTEXT for how to apply this to investing, sign up for my FREE weekly newsletter
brianstoffel.com
To review the steps for a Reverse DCF
1️⃣ Collect some basic data (cash, FCF, debt, price)
2️⃣ Find shares outstanding
3️⃣ Input numbers
4️⃣ Make assumptions (discount rate, terminal multiple)
5️⃣ Enter the stock price
6️⃣Adjust the Growth Rate
7️⃣ Ask yourself: "IS THIS REASONABLE?"
1️⃣ Collect some basic data (cash, FCF, debt, price)
2️⃣ Find shares outstanding
3️⃣ Input numbers
4️⃣ Make assumptions (discount rate, terminal multiple)
5️⃣ Enter the stock price
6️⃣Adjust the Growth Rate
7️⃣ Ask yourself: "IS THIS REASONABLE?"
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