Everything is a DCF model.
This week, I'm sharing my notes and learnings from my reading of the article "Everthing is a DCF model" by Michael J. Mauboussin.
Welcome to all new subscribers,
This week, I'm sharing my notes and learnings from my reading of the article "Everthing is a DCF model" by Michael J. Mauboussin.
In this article, we learn the advantages and disadvantages of the different valuation methods. (DCF, Relative valuation)
And also for which type of investor this approach can work.
Spoiler (Value Investor)
Let’s dive in,
The DCF (Discounted to Cash Flows) is a valuation method described in the book "The Theory of Investment Value" written by John Burr Williams in 1938.
In simple terms, it is a method that allows a company to be valued on its future cash flows. It is called the intrinsic value of a company.
This article describes why as investors we value companies based on DCF (Discounted to Cash Flows) and why many firms are skeptical about it.
Here are my key learnings :
1. The price is terribly attracted by the intrinsic value of the company.
2. The objective is therefore to buy a company below its intrinsic value.
In the private and public markets, the value is always to determine the future cash flows. So everything is about DCF model
Everything is a DCF Model but why fund use multiples?
Often they do a bad valuation with an unrealistic growth rate.
The parameters are difficult to estimate and small changes on this can change a lot your final valuation.
Use DCF for a start-up is difficult because the range is high due to the uncertainty of future cash flows
Factors that drive value are :
growth from investments
cost of capitals
competitive advantage
the opportunity cost of capital
DCF is often used by corporate bonds because except for the risk the necessary parameters are provided.
In the same logic, DCF works well for real estate because it’s a simple business. Assets can generate X cash flows.
Conclusion
3 questions to know the maximum value of a company :
Are you sure the business can generate future cash flow?
How many dollars your business can generate?
What is the risk-free interest rate?
Source : https://www.morganstanley.com/im/publication/insights/articles/article_everythingisadcfmodel_us.pdf