💡Discounted Cash Flow, or DCF, is a way of determining a company’s value by estimating how much money it will make in the future, or it’s “future cash flows”

We won’t go over the exact formula for DCF since it’s pretty complicated, but we’ll introduce you to the concepts behind it 🧠

In short, DCF says that the value of a company today is equal to the sum total of ALL the money it will make in the future

Money in the future is worth LESS than money today, because a company can invest the money it makes today to grow it into more money, just like how you invest your money in stocks 😎

For example, if you have $100 today, you can invest it into stocks, and with an annual return rate of 10% a year, you’ll have roughly $260 after 10 years 💰

But $100 in 10 years is just … $100 🥲

So, DCF applies a “discount rate” on cash flows in the future – this is where the name comes from (“DISCOUNTED cash flow”)

The farther in the future, the larger the discount rate 🏷️

You might be wondering: how do I know how much money a company will make in the future?

Well, the short answer is, you’ll have to guess 🤷

Typically you would look at a company’s growth rate over the last few years as well as broader market trends, to predict a company’s future cash flows 🔍

In order to come up with a “conservative” estimate, you can assume that at a certain point, a company will just stop growing ❌

So in review, DCF is just a prediction of how much money a company will make in the future, with a discount rate applied, because money now is better than money later.

Bloom’s intrinsic value that you can find on a stock’s page is a combination of a DCF valuation, as well as its value based on relative ratios 😳

While we do all the calculations for you, it’s always good for you to know how we came up with the number that you see ✅