DCF valuation (discounted cash flow) explained simply
A DCF calculates a company’s value from its future free cash flows. Each cash flow is discounted to today with WACC, and the sum divided by the share count gives the fair value per share.
The three steps
At a glance
- Free cash flow (FCF) = money left after investment.
- Discounting: $1 in 5 years is worth only $0.62 today at a 9.86% WACC.
- Terminal value: value of all years after the forecast period, with a perpetual growth rate (usually 2–3% for us).
- The result is a range, not a point: bear, base and bull scenario.
- Limit: With negative FCF (e.g. Amazon because of heavy investment) a DCF alone is not enough, so we use sum-of-the-parts.
Formulas
PV of FCF = FCF in year t ÷ (1 + WACC)^t Terminal value = FCF in year 10 × (1 + g) ÷ (WACC − g) (g = perpetual growth) Fair value = (sum of PVs + PV of terminal value − net debt) ÷ share count
Worked example: Meta, base scenario (simplified model, as of Oct 2026)
Assumptions: trailing revenue $241.6bn; FCF margin rises from 7.7% to 28% over 5 years; growth falls linearly from 15% to 5%; WACC 9.86%; perpetual growth 3%; 2.52bn shares.
| Year | Revenue growth | Revenue ($bn) | FCF margin | Free cash flow ($bn) | Present value ($bn) |
|---|---|---|---|---|---|
| 1 | 15.0% | 277.8 | 11.8% | 32.7 | 29.7 |
| 2 | 13.9% | 316.4 | 15.8% | 50.1 | 41.5 |
| 3 | 12.8% | 356.9 | 19.9% | 70.9 | 53.5 |
| 4 | 11.7% | 398.5 | 23.9% | 95.4 | 65.5 |
| 5 | 10.6% | 440.6 | 28.0% | 123.4 | 77.1 |
| 6 | 9.4% | 482.2 | 28.0% | 135.0 | 76.8 |
| 7 | 8.3% | 522.3 | 28.0% | 146.3 | 75.7 |
| 8 | 7.2% | 560.1 | 28.0% | 156.8 | 73.9 |
| 9 | 6.1% | 594.3 | 28.0% | 166.4 | 71.4 |
| 10 | 5.0% | 624.0 | 28.0% | 174.7 | 68.2 |
- Sum of present values years 1–10: $633.3bn
- Terminal value in year 10: 174.7 × 1.03 ÷ (9.86% − 3%) = $2,623.4bn, discounted $1,024.4bn
- Enterprise value: 633.3 + 1,024.4 = $1,657.7bn
- − net financial position $37.4bn = equity value $1,620.4bn
- ÷ 2.52bn shares = $643 per share (price $642.62)
*Note:* This is the same simplified model as in the calculator on the Meta page. The net financial position is set there so that the analysis’s base case ($643) comes out.
What the assumptions do (Meta, base = $643)
- Target FCF margin 22% instead of 28% → $505
- Initial growth 10% instead of 15% → $520
- WACC 7.86% instead of 9.86% → $956; 11.86% → $474
- Range of the analysis: bear $325, base $643, bull $1,024
Pitfalls
- The terminal value carries 62% of enterprise value. Small changes in g or WACC act most strongly here.
- The FCF margin is the lever: At Meta it is currently depressed by investment. Whether it heads back toward 28% decides the valuation.
- Garbage in, garbage out: The model is only as good as its assumptions. That is why we show them openly and offer a calculator to play through yourself.
- Negative FCF: Amazon has trailing FCF of −$7.6bn. The FCF DCF is $104, the price far above, so we use sum-of-the-parts there.
FAQ
- Why not just use the P/E? The P/E is quick but says nothing about growth, investment and risk. The DCF makes these assumptions visible.
- How accurate is a DCF? It is not a price forecast but a calculation under assumptions. That is why we show bear/base/bull.
- What is a reverse DCF? You turn the calculation around and ask which assumptions today’s price requires (e.g. Meta: about 15% growth at a 28% margin). See reverse DCF.
Further reading
- Analyses: Meta with DCF calculator, Amazon, Merck & Co.
- Next terms: WACC, NAV discount
Figures from our analyses, see each example for the date. Last updated: Nov 1, 2026.
This content is for information only and is not investment advice. The examples are model calculations based on assumptions and may differ from actual value.