How to perform a Discounted Cash Flow Model Step by Step! (Intrinsic Value for Beginners)

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In this video, I take you step by step on how to perform a discounted cash flow analysis. Let me know if you have any questions in the comments below!
How to calculate the discount rate: • How to Calculate Weigh...
Terminal Value formula: =J14*(1+K18)/(K19-K18)
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[@alvareza3]

You keep putting stuff up like this. I’m thinking more and more of that patreon. It’s quality stuff. I’m working on my MBA and you break it down like my professor does but without the huge price tag of tuition.

[@Dividendology]

Much appreciated! If you end up joining, be sure to join the discord! Would love to have you a part of the community!

[@brianborkowski5977]

@@Dividendology excellent video. I have subscribed. I am having trouble finding the Growth Rate of 15% that you plugged into the DCF. When I look at the analyst growth rate for Appl via Yahoo Finance, its around 7%. Am I looking in the wrong area underneath the "Analysis" tab

[@staceygeez]

Thank you so much. You really helped me create something that is real and I actually understand. Unfortunately, I didn't get this from my instructor.

[@masterboxxx]

Out of 100 videos I've watched, your explanation is by far the best. Thank you for taking the time to create such a clear and concise video and thats coz u walk step by step

[@Dividendology]

You're very welcome!

[@imcinema]

Good work! Two questions, why do you have 2021 two times on the FCF Growth numbers? And how do you get your first number on FCF growth when the formula is based on the previous year? Thanks!

[@stefanandreiclim7349]

Thank you for the very well explained videos. One question, where can i find the Free Cash Flow? On macrotrends it is not available anymore and on Yahoo Finance and Seeking Alpha only for the last 5 years. Thank you again and keep up the good work :)

[@ARM13491]

Hi just a question, did you calculate all numbers in $ 000 ? Does it mean the final DCF price /share should also be multiplied by 1000 to reach at normal numbers ?

[@joseafalvel]

You are a master, no more to say, I'm so impressed !!

[@Dividendology]

thank you!

[@SuperTWIY]

in other tutoials the year for the calculation of present value (the number behind the ^) of the terminal value is set to the last of the growth years. in this one he seems to use one year after (11)

[@justinkoehn1343]

Thank you for this resource !!

[@alexzander42]

Hi. Why did you use the 10 as the discount period for terminal value? Most things All other resources I see recommends using the last period (9)

[@thepickyinvestors]

Great video. One thing I think many people struggle with is with getting to that terminal growth value.

[@Adrik808]

Just use an exit multiple instead and only forecast a 5 year period problem fixed 😂😂

[@thepickyinvestors]

@@Adrik808 that's pretty much the solution I implemented :)

[@anthonyminniti17]

Great job, super simple and concise. Thank you very much

[@Dividendology]

You're welcome!

[@armandcharlesngabirano3795]

question sir maybe I didn't catch the details very well but I wanted to ask you what is the WACC in the value of WAAC in this example

[@Firekid144]

Thank you!

[@calebthottukadavil4417]

Thank you boss for the video!

[@utkarshgaikwad2476]

You forgot to add a Margin of safety in this calculation

[@brando2118]

great vid

[@alanden009]

Good information. Only thing I would include is a margin of safety. This would be applied to the DCF share price to provide some allowance for error in the equation/market.

[@xristaras19971]

Can u explain this please ? i found a dcf model with margin of safety but i cant understand what this % is it for. Thanks

[@alanden009]

Think of the margin of safety % as risk. So for instance a 0% margin of safety would imply that the DCF is 100% accurate and you completely agree with the numbers/outlook of the stock. You would add a "x" % of safety to allow room for error or a buffer in the event the stock/company does not perform as projected/estimated. The actual amount of "x" is really based on your research and personal preference. Generally a low margin of safety could be used for a "safe" stock opposed to a more risky stock. Good rule of thumb is 10% -20%. Essentially, it would tell you to buy the stock at a lower price opposed to the calculated price for the DCF. Buying it at a lower price gives you a higher opportunity to increase your overall gains/profits from the stock. I hope this helps.@@xristaras19971

[@TheVital96]

Wouldn’t his margin of safety be implied in his anticipated growth rate of 15% instead of the 25.63%?

[@Whatmyboy]

@@TheVital96that’s what I thought

[@ejangelada282]

Is it ok to do 5 years instead of 10 year annual free cash flow?

[@THE_YAD]

Thank you for the step-by-step process. do you think it can be automated, by entering only the ticker ?

[@Dividendology]

That may be possible through web scraping! I personally believe that a DCF can be far more accurate with some manual input to project things like growth rates and discount rates though.

[@_VlCTOR_]

Great video, thank you for sharing

[@Dividendology]

Thanks for watching!

[@georgelokko4333]

how do you find the growth rate where yyou had 15%

[@Raqonteur]

Excellent video. As a relatively new investor this was something I've been looking for. Simple. Well explained. One question. Using Yahoo Finance (from the Uk) I can't seem to find a figure for total debt. there is current debt and long term debt but no total. is it the total of these two figures or total liabilities or something else altogether?

[@FreeAgentChill]

I have same problem.

[@alistairhopkins9957]

Love the video... wonderfully clear and I've finally built a spreadsheet using your formulae, etc. One question: what is the growth rate? is it revenue, cash flow, net profit? How long should you apply it for? 10 years (if the data is available) or 5 years CAGR. As I say, it's a great spreadsheet but without this, I'm all over the place in terms of intrinsic value.

[@Dividendology]

It should be a free cash flow growth rate. It should be a long term projection

[@randall_c_6163]

I like to ask what was the purpose of calculate the 25% growth figure if your only going to use 15% is it just for reference that any projection below 25% is within the marginal of safety ?

[@cloudz83]

This is great but it seems the magic is in predicting accurate free cash flow growth rates YOY and TV. Free cash flow growth rates are not readily available for many companies outside of big name large caps and you need full detail historical financials, decent revenue projections, projections for all the drivers of FCF (N.I., change in CAPEX, etc), industry and company specific knowledge, etc to get to a decent FCF growth projection. That more nuanced part of the analysis is what I'm struggling with and I wonder if it's worth the trouble of modeling intrinsic value in this fashion with ballparked growth rates like those used in the video, thoughts?

[@theoldworldwasbetter]

At 8:34, "sum of cash flows", should this include or exclude the terminal value? (Cell K15). You include it in the sum, but in this way we sum up all future cash flows and the terminal value of all future cash flows, and this would seem a duplication of the latter?

[@Dividendology]

You sum them all. Terminal value would be the sum of future free cash flows past the last year that you calculated.

[@bomar080]

I recommend you review your spreadsheet video for possible things to correct, that may be confusing

[@TheCashFlowChannel]

Great video. DCF is my favorite methode. You are constantly getting a lot of views on your videos. Do you have any tips for me? :)

[@Dividendology]

provide quality content and stay consistent :)

[@johnkiin219]

Hey QQ, What do you put in as your shares outstanding if your revenue are in the billions but your Shares Outstanding is 400 million, what number do you put into the share outstanding part? Love your videos, keep it up!

[@Dividendology]

Hey John, you can put in the full values if you want, or you can enter the data another way, for example in thousands. As long as you are consistent with how you enter it, it will work!

[@Remon-fh3ic]

Hi. Can someone explain me what to fill in if the outstanding shares are; - 104.772B - 9.312B

[@vojta5202]

Hey, could you guys tell me the difference between this DCF model and a FCFE model? TYSM!!

[@khindani]

i did a dcf with conservative numbers on google and the lowest price is 220 i got, so it might be ridiculously undervalued

[@aryanjain5576]

Hey great video. Just wondering if the shares outstanding is 16.07 Billion, shouldn't equity value be divided by 16070000 to be consistent with the short form you choose? and so the DCF price would be a lot lower?

[@mastermt5904]

Exactly, feels like he mistaken 16 billion as 16 million

[@williamhuhn7603]

how did you add the power when you was setting up the PV of FFCF

[@runawaystilton3738]

Found it! Shift '6'

[@luxlucis01]

Hi. I'd like to ask you few questions: 1. Why did you use total debt in your calculation? First of all, the company has other form of assets (like long term assets) that can be liquidated to pay off the debt. Isn't it correct to use current debt instead? 2. Why one should use 10 year projection? I have seen 5-7 as well, however the results my differ hugely. Thanks

[@zacleongzehao7285]

1. Free cash flow (to firm) in the simplest form is the value attributable to debt and equity shareholders. You need to remove the present value of free cash flow attributable debt holders, then you would get the equity value. You cannot use just current debt (debt for next one year) as the free cash flow is attributable to long term debt holders as well. Also, you can’t account for liquidation under this method simply because this method assumes that the company is a going concern ie still functioning. At the simplest form, the liquidation value of the company to equity holders = market value of assets - market value of debt, ie assets net of paying off debt. 2. Typically 5 years for a stable company, but some do 10 years before reaching a constant rate of growth (terminal growth rate/terminal value) for high growth companies so the “drop off” in implied growth rates isn’t too high ie from 30% growth rate in year 5 to 2% terminal growth rate after y5. 😊

[@nothereyetlost]

Yes what does that number tell you when compared to current price?

[@Dividendology]

If it’s overvalued or undervalued

[@junkitwong5466]

Mean that the DCF price per share $243.99 is undervalue now ? The price for apple now is $ 189.

[@nothereyetlost]

@@junkitwong5466 that’s a great underbake at 25%

[@samdeboer5009]

So what about a startup having losses in free cash flow but decreasing on a fast basis. Spreadsheet is giving an error when filling a loss

[@Darudo_sandstorm]

Yeah I was getting the same problem. I just decided to avoid companies with negative cash flow altogether.

[@justodaverio6710]

ANd how do I calculate the perpetual growth rate? Is it the same for every company? I how do I get it? thank you very much for you brillant work

[@Dividendology]

it will typically be about 2.5%

[@justodaverio6710]

@@Dividendology thanks. You are brillant man

[@hansenz28]

Good work! I'm not exactly sure why you cut off the zeroes at the end of Cash and Cash Equivalents, Total debt, and Shares outstanding, could you please explain that?

[@Dividendology]

As long as you are consistent with the format you input them in (ex: thousands or millions) then it doesn’t matter how you input the data!

[@hansenz28]

@@Dividendology got it, thanks!

[@analyticsx3]

The only confusing part is the equity value / shares outstanding. The scaling is different in each of your cells.

[@subratapal2335]

Can you please tell me growth rate which one can I consider like Revenue Growth Rate or Profit Growth Rate ?

[@Dividendology]

Free cash flow growth.

[@philochristos]

I can't find the free cash flows on macro trends.

[@BelleDividends]

You need to learn the copy-paste function on your computer! Way easier and faster than just typing it in, and error proof.

[@justodaverio6710]

Would you be so kind as to tell me how to find the growth rate that you name at minute 4:06 in yahoo finance or seeking alpha. Could you give me an example of where I could find it? excuse the question. I mean I go to those pages, but sorry for my difficulties finding the exact place of the ratio, I found that aapl would grow 9.5 % next year, is that ok to put in growth rate?

[@Dividendology]

if thats how much you think they will grow, then use it!

[@justodaverio6710]

@@Dividendology ok I understand. And how I do I estimate how much It will grow? I don't know to estimate how much it will grow?

[@jamesnguyen2911]

@@justodaverio6710 no one can accurately predict the company's future growth rate. You need to do your own research, read other analyses on the stock, do lots of homework to give your "best estimated prediction" of the company's growth rate. This is where things can go wrong.

[@jpg_6]

Great video! Do really mean that we shall use Cash & Cash equivalent in the calculation? Because in the video you are using Cash, Cash equivalent + short term investments.

[@Dividendology]

Cash and cash equivalents work, but most short term investments are liquid enough to be included.

[@Gabriel-gw8hf]

How do I perform a DCF for companies with negative FCF?

[@aidanwatkins6185]

You don’t, you wouldn’t buy a company that has negative FCF

[@TTTT-sj3vz]

price to sales

[@36boys.]

how did you come up with 15% growth rate?

[@venkkandadai6042]

He looked at the current FCF growth rate average of 25% and just qualitatively stated it would be less than that over next 5-10 years, so 15% was just his guess. The growth rate is the most important assumption to the DCF as you are trying to determine how FCF can grow YoY in the future. It’s not an exact number/calculation and is based on an educated guess based on how well you understand the company you are evaluating. The more accurate your future growth rate, the less Margin of Safety you need to apply at the end of your intrinsic value calculation

[@mohammadhelaluddin7072]

What if the free cash flow will be negative

[@robertlaw8510]

What does it mean when a company has for free cash flow for a year: 212.08 when their annual revenue is over a billion dollars?

[@silverbullitt24]

Check the definition of FCE. It is the money left over after paying for cost of operations and capital expenditures

[@calebthottukadavil4417]

Hey boss, I have some money to invest. I don’t know if it is the river time to invest. Cause what if the market falls even more and I could have gotten stocks for an even more undervalued rate. For example meta is currently undervalued at lets say 134 what if falls 3 weeks later to 126. So if you have an idea that the stock market will still be bearish can you tell me a good time to invest ? Thank you boss I appreciate it

[@Dividendology]

Its nearly impossible to predict short term market fluctuations. That is exactly why calculating intrinsic value and investing for the long term is so important.

[@alanmurrell6620]

Since it is impossible to predict the market, the only thing you can do, really, if you think it is undervalued, then buy. If it goes down further, then happy days: buy more.

[@justodaverio6710]

I have analyzed AApl, and the DCF Price per Share: is 1616.63 I think I did it ok, (?)

[@Dividendology]

sounds like your off by a bit.

[@justodaverio6710]

@@Dividendology ok, for example: if it says Implied Shares Outstanding 6 2.47B. do I need to put 2470? (I mean, four digits?) or it depends on the digit of the free cash flow?

[@decybelszortkat8204]

why 2021 stands for 2020 data (FCF), and 2020 for 2019 ????

[@junk8714]

I think it represents start of the year 2021 so it has 2020 numbers

[@decybelszortkat8204]

@@junk8714 thanks, that make sense ;)

[@herr7979]

But cash and equivalent isn’t 62.639.000??same thing for debt , where are the 000 ?

[@spaideman7850]

16 billion = 16,070?

[@leonaskindra179]

IN MILLIONS

[@andrewhodnick6276]

What if yahoo finance says N/A for cash and cash equivalents?