CJ - great post. I agree with all these comment on DCFs, and in the same vein for me, doesn't this also apply to the idea of customer lifetime value if you are using discount rates? As interest rates have shot up, hasn't it blown up the economics of many businesses?
I've always been a bigger fan of the reverse DCF, but this can only be done with public assets. Starting with the stock price and backing into the range of assumptions -- sales growth, margins, investment requirements -- to justify the price. I find them much more informative. Don't ignore the stock price. Its telling you something.
I also like this Mauboussin paper, which uses current stock price to figure out market implied ROIC. Its like a reverse DCF, but expectations of a company's ROIC. I know it uses WACC - I dislike the WACC too.
Nothing is perfect and mathematical about the future in any domain ... it is what it is ... given that the value of any asset is it's DCFs, how else could we at least give it a try ? I wish I knew a better way/methodology (besides absolute valuation via DCF and relative via multiples) ...
Key to know where the danger lies, but for lack of a better way/methodology, one does what he/she can, or ? To me it's important what the market thinks on aggregate about the cash flows and the discount rate, not 'my super dooper DCF' ... only then one can make some inferences and maybe find some alpha ...
CJ - great post. I agree with all these comment on DCFs, and in the same vein for me, doesn't this also apply to the idea of customer lifetime value if you are using discount rates? As interest rates have shot up, hasn't it blown up the economics of many businesses?
I've always been a bigger fan of the reverse DCF, but this can only be done with public assets. Starting with the stock price and backing into the range of assumptions -- sales growth, margins, investment requirements -- to justify the price. I find them much more informative. Don't ignore the stock price. Its telling you something.
I also like this Mauboussin paper, which uses current stock price to figure out market implied ROIC. Its like a reverse DCF, but expectations of a company's ROIC. I know it uses WACC - I dislike the WACC too.
https://www.morganstanley.com/im/publication/insights/articles/article_marketexpectedreturnoninvestment_en.pdf
Anton, thanks for the thoughtful response and the great resource.
I like how you tie this all back to customer life time value. That's the real key in all of this.
I agree with the sentiment that no methodology is perfect and you indeed have to try something. Thanks for the great discussion points
I can’t agree more on each line. DCFs are dangerous.
(As someone who made DCFs for a living)
Lol I’m with you man. I was a DCF jockey for years, and only recently saw the light
Nothing is perfect and mathematical about the future in any domain ... it is what it is ... given that the value of any asset is it's DCFs, how else could we at least give it a try ? I wish I knew a better way/methodology (besides absolute valuation via DCF and relative via multiples) ...
Key to know where the danger lies, but for lack of a better way/methodology, one does what he/she can, or ? To me it's important what the market thinks on aggregate about the cash flows and the discount rate, not 'my super dooper DCF' ... only then one can make some inferences and maybe find some alpha ...
Thanks for the article & discussion, cheers!
Mav