It is never too late to learn new things

No, that’s what they are worth today. It sounds trite, but in 10 years, they are worth the NPV of the next 10 years of cash flows at the discount rate at that time.

You model what you think the stock will do in the future, and you figure out what it is worth under those assumptions in the present. If you guess poorly, you will overpay. Every year (or quarter, or day) things might change to alter your assumptions, and you would update your model accordingly.

What I posted was was the summation of

profit in year 1 * (growth rate)^N / (1 + risk free rate)^N

for N = 0-9.

For a Saul stock, you’d probably say “well, we’re losing money, but we’re making money faster than we’re spending it… we’ll saturate the addressable market space in 5 years, so we’ll grow expenses at 30% for years 0-4 and revenue at 50% for years 0-4, then after that level off to 5% expense growth and 10% revenue growth”. Since you are buying shares in a company and not whole companies, you probably going to want to divide those future profits by the expected number of share at that point in the future, to account for dilution from stock based compensation. I’m not saying I endorse that, but that is how you might model that kind of growth in a presently unprofitable but fast growing company.

You can also try what I did with a risk free rate of 1%, and then change it to 5% to see how sensitive they are to interest rate changes. Doing long term forecasting with very low interest rates was pricing for perfection, and not safe.


Thanks so much Ajm101!!! It is beginning to make sense now.
And wow, I dread to see how the interest rate changes will affect the price… I always wondered why the market is this worked up by interest rates increase…Surely, a 2% increase can not result in a 30% drop…What a fool I was…All along there was some means to actually make sense of the mayhem!!!

Thanks again!

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My pleasure, I’m barely decent at this, hopefully some more knowledgeable people can correct my mistakes. I’m certainly oversimplifying things. But what you said about “make sense of the mayhem” is why Ben Graham’s Intelligent Investor has an evergreen quality to it.

For just one example, many companies don’t pay out dividends. They reinvest the profits in future growth, and invest it in profitable new projects. A company’s competence at doing this (ROE) gets important in models. Best luck with your investing, and thanks for the exchange.

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DCF models work very well for companies that are predictable but for growth companies they are pretty much worthless. If you want to see what I mean just go over Aswath Damodaran’s Dcf on Tsla.



I don’t follow Damodaran. Do you mean this? Musings on Markets: A Do-it-yourself (DIY) Valuation of Tesla: Of Investment Regrets and Disagreements!

I don’t think that’s an indictment of DCF. Tesla is just a pretty unique company in a lot of ways. It looks like Damodaran sold at a split adjusted price around $43? I bet he wishes he held, but sometimes one makes mistakes. What is Buffett’s #1 rule, though?

As a counterpoint, lets look at Upstart, and My Portfolio at the End of Aug 2021 - maybe a DCF analysis wouldn’t have helped here, but UPST is down almost 90% from that post. We are trying to predict the future when investing, and that is intrinsically risky to the downside and upside.

DCF is a tool, not a strategy, and I disagree with you that they are worthless for high growth companies. Models are models, and GIGO applies. Let me extend my example from earlier. Say we have “company 5”, that sits around doing R&D for 5 years, then releases a blockbuster that creates a $500M annual profit invention that grows 10% annually after it debuts to the world. What is that worth?

DCF says:

Company 5
0 0 0 0 0 500 550 605 665.5 732.05
1 1.04 1.0816 1.124864 1.16985856 1.216652902 1.265319018 1.315931779 1.36856905 1.423311812
0 0 0 0 0 410.9635534 434.6729892 459.750277 486.2743314 514.3286198 2305.989771

$2306 per share.

What if that company instead enjoys 2 years of success of that product, but in year 7 there is a disaster of some kind, and profit drops by 60% - but bounces back by $50M annual after that - and the discount rate goes to 1%?

Company 5
0 0 0 0 0 500 550 100 150 200
1 1.04 1.0816 1.124864 1.16985856 1.216652902 1.265319018 1.277972209 1.290751931 1.30365945
0 0 0 0 0 410.9635534 434.6729892 78.24896294 116.2113311 153.4142985 1193.511135


The company doesn’t disappear after 10 years, so many one wants to pay more. Maybe someone really likes a company and wants to pay a 20% premium.

What various net present value financial models give you is a framework to discuss a value quantitatively. If someone says a company should command a 10x revenue multiple, you ask them what there TAM is, what their terminal net margin rate is, and you can see if that valuation holds water at all. It doesn’t matter if the company is a transformational SaaS or sells tin buckets.


No. Sorry for my cryptical post. I am very prone to use 4 sentences to cover an 8 paragraph issue. I was taking a great leap to say that a stock’s p/e “should” be the inverse of the treasury 10-year yield. The yield today is 3.77% . The inverse is 26.5. The value investor would want a discount to that. Graham wanted what, a 1/3 safety factor?

So the idea was exactly what you asked, “What has to happen for that?”. There are other theories (of course) on what a “correct” p/e is. I did a quick search and (of course) did not write down the links. There was a MF article that mentioned (did not advocate for) a “correct” p/e of 1. A more common benchmark is a p/e equal to earnings growth rate (rearview mirror approach). That never made sense to me as it seems to give no value to current earnings. The PEG uses a forward looking earnings (forecasted). Saul’s approach was to use a rearview approach with the apparent assumption that earnings growth would maintain the fairly recent growth trajectory–his 1yrPEG. That worked splendidly, until it didn’t. I didn’t because it got discovered and there weren’t any sub-1 1yrPEG’s. Ironically, this was a valuation based investment system which no longer worked because there weren’t any undervalued stocks.

So then came profitless hypergrowth and EV/S, which worked–until it didn’t. And for the same reason. No more 100% revenue growth with EV/S of… 4, 5, 6? And then the metric was to compare peers, the way Bert still operates. The cohort of 60% growers average an EV/S of… 27 and XYZ’s is 20–and tweak for some flavor of cash flow. That stopped working when all the cohort had unreasonable EV/S. Cheaper than ridiculous isn’t necessarily cheap.

A proposed evaluation method was to look at fast growers. Not hypergrowth. More mature growth like Sales Force, Service Now, maybe Palo Alto Networks. What EV/S do they have? (Still can be “cheaper than ridiculous”, of course). 20 or 25% growth is still exceptional from a broad market perspective. Would you take a 25% CAGR? Now you run into the same problem as the DCF approach. Fraught with predictions of future performance and future tech advances and future competitors and present competitors which evolve to eat your lunch by moving into adjacent verticals, etc. It is a fragile model. Highly dependent on at least two factors: 1) The predicted revenue growth trajectory, and 2) Mr. Market’s mental state. "“Mood changes, or swings, refer to abrupt shifts in your mood or emotional state, and may be a normal response to stress or hormonal shifts . However, they can also signify a mental health disorder like borderline personality disorder or bipolar disorder, which is characterized by extremely high and low moods.” Never a shortage of stress in the world and certainly not now. We witnessed and to an extent participated in extraordinary stock investment returns. It is difficult to get weaned from those highs. Perhaps the real question is whether we should be investing in tech growth at all, or to what extent. And if so, pick individual stocks or a broader basket or ETF’s? What basis do I have in choosing between internet security and e-commerce sectors . Between companies, ZS and OKTA. S or CRWD? GLBE or SHOP? Central bank responses to G20 fiscal “policy” has so distorted price discovery that maybe nothing works. Unprecedented actions just grossly inflated asset prices. That’s the reality and we are having to deal with inflation of real goods and deflation of financial assets–and derivatives of financial assets in particular, I believe. For those who are building wealth, I would put maybe 15% into a basket of high growth. 40% into small cap ETF. 45% into midcap value. Something like that. Every month. Would I do that? Probably not, but do as I say, not as I did/would do.
Dreamer has outlined his target, at least time-wise. Dreamer, you are taking on risk in order to protect your capital (shorting and buying puts). In your situation, I would consider very short term treasuries that are yielding 5.5% to 6% right now. I don’t know how easy that is to do. The treasury that I have was issued 10/15/2020. I purchased on 9/23/22. Maturity is 10/15/23, so it was 13 months out. Coupon yield is… drum roll… 0.12%. Current 3 year is 4.23% so that is a reference to the disruption the market has endured. 33 times increase in yield. Poor SVB, eh? (I paid only $95.90 so I didn’t invest for 0.12% yield). Here we have a wealth builder, a close-to-retirement guy who wants/needs “just a little bit more”, and an old guy 20+ years into retirement who needs the wealth to last another 19 years (28 for DW). And each owning, or willing to own at “right price”, DDOG. And, I suggest, all not qualified to determine “right price”, which quite probably is not knowable anyway.

What has to happen for DDOG to get to p/e of 25? Maintain a 10% per year reduction in revenue growth rate from its rate 6 months ago while maintaining GM and reducing SG&A to % of revenue to those of the mature growers. Dreamer modeled a much more rapid decline in revenue growth rate than I did. He is waiting for a correspondingly much lower price. I have 5.4% of port in DDOG, up 20% on the position established December, January, February and March.

Throwing rocks at the moon, folks.



Thanks a lot KC, Ajm and Andy! Very insightful!!

In every DCF model, don’t you need a terminal growth rate at the end of the growth trajectory? Say, year 11 to infinity.


There are a lot of unique companies out there and that is only one of them. That also isn’t the only DCF that Damodaran ran on Tsla and he has admitted that it was pretty much a failure.

Let’s say you project it to grow at 10% and instead it grows at 100 percent, now what does your model look like. The problem with High Growth companies is that they can grow much faster for a lot longer than most people think.

** As a counterpoint, lets look at Upstart, and My Portfolio at the End of Aug 2021 - maybe a DCF analysis wouldn’t have helped here, but UPST is down almost 90% from that post. We are trying to predict the future when investing, and that is intrinsically risky to the downside and upside.**

If you followed UPST I am sure that you wouldn’t have been able to build a model to project it’s growth. Especially with all the rate hikes we went through. Let us see you do a model on Upst now for the next 5 years and see just how well you do with it.


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DCF models never convinced me of their usefulness for making investing decisions. Primarily because they are based on assumptions and those assumptions are based on other assumptions and those assumptions are also based on other assumptions…

Unless you are an insider in the company, or an analyst with deep industry knowledge, your assumptions are bound to have errors on either side of the calculation. You will end up with a present value calculation that could be misleading.

For growth stocks, I prefer to use these two valuation metrics in conjunction with each other:

Enterprise value ($) / Gross profits ($)
EV is self explanatory.
Gross profits = next 12 months revenues * most recent gross margin
EV/GP ideally should be less than 15 or else it might be overvalued.

(Enterprise value/Gross Profits)/Forward growth rate %
Forward growth rate is the next quarter’s yoy% growth rate estimate.
I prefer (EV/GP)/Fwd gr rate to be less than 25 or else it might be overvalued.

Here is an example using two popular stocks.
Screenshot 2023-05-28 at 9.37.58 AM

Apple is quite over-valued using these metrics.
Enphase is just slightly over-valued.

That said, valuation metrics and DCFs by themselves do not tell us how investors will behave. Some investors will buy AAPL over ENPH any day even at these prices…as is quite evident in the recent mega cap tech buying spree.


  1. I like to refer to Morningstar’s fair market value, which is based on their DCF analysis.
  2. For growth stocks, revenue estimates that are more than say 12 months out are not that dependable.



Thanks Beachman! It’s nice to have some metric to at least compare with peers…thanks again.

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BeachMan, I would like to actually see a DCF model that actually worked on Growth Stocks. I really would. If they worked I would be all for it but whenever I find someone that uses them, and ask them to prove it, they never actually come up with one that we can study and see how well they do.

If we go back to q121 and look at UPST it was growing Revenue at 89 percent, It had a FCF margin of 4 percent, 260 million in cash and little debt, and they were profitable, They next quarter their Revenue exploded along with their earnings and FCF margin. So if you were in that time how would a DCF even make sense? Are you going to say they are going to grow Revenue at 10 percent? That wouldn’t make sense.

Now come to UPST revenue growth last quarter. Revenue down 67 percent, earnings negative, more debt than cash, FCF margin at -67 percent. How do you even model that? Now someone that is doing a DCF would tell you, maybe, that they never would look at a company like UPST. I would agree that I wouldn’t either. If I was doing DCF models I would look at companies like SBUX and Costco. Much easier to predict.

I hope that we can discuss this in a collegial manner because I really want to have my mind changed if it actually works for Growth Stocks. I just haven’t seen anything that really helps. So, the way I look at this is that nobody is going to be 100 percent correct, but I want to find myself, hopefully more right than wrong. Something that will give me an edge. So I track all my companies low and High P/S for every quarter. Then I have the high and low P/S of each company going back as far as I have been tracking them so that I can tell when they are nearing the upper or lower bands of their trading ranges. It isn’t perfect but I think if I buy towards the bottom I should be getting a better “deal” than at the top. In ways you could say it is like a DCF model except the inputs are not done by me but by the markets.

Thank you for the discussion and I hope I didn’t step on anyone’s toes. It is good to discuss this and nobody in this discussion is right or wrong and a lot of smart people use some part of what all of us are discussing.



When doing DCFs, can we source opinions on how people forecast growth rates. Here is my question

  1. When valuing companies which are high growth and are somewhat FCF positive (with high FCF margins), what would be your recommendation in terms of forecasting their FCF growth rates. Are their any industry standard ranges you can point us to? For instance, lets look at ServiceNow or Crowdstrike, whose current FCF growth are around 20% and 40% respectively, how would you model them in the future? Do you take a comparable approach for these companies which are in relatively new industries (and compare them to the MSFT and Apple’s of the world) or is there another approach to value them appropriately?
  2. Similarly, what sort of terminal FCF multiple one should be assigning? Should we be looking at industry stalwarts or is there a more educated approach to doing that?
    Thanks again for all the help.

IMO, this is fundamentally the wrong way to look at it.

It isn’t “Well, what BETTER numbers do you have to plug into my model?”

I IS “Excuse me while I toss this model into the dumpster and set it on fire.”

IMO… there is no way to “fix” DCF to be suitable for high growth companies. I can’t be any more plain than that. Nevertheless, I acknowledge this is just crazy talk to some and they’ll follow more skilled model builders (Aswath Damodaran) into building more models (like his Tesla modeling) suitable only for the dumpster.

Putting more design effort into a platypus will never make it into a rocket ship.

He is no fool who gives what he cannot keep to gain what he cannot lose.

Thanks Rob. My idea of doing simple DCF’s is bring some rationality into my thinking. I am not trying to build elaborate models as I perfectly understand that there are so many inputs involved which either 1) I have little understanding of and 2) with a better understanding, I could still be out to lunch.
So, I only build simple DCF’s to see how the companies have been growing, their main revenue/cash flow drivers, see management’s estimates and compare against their competitors and project with multiple scenarios of what could happen. This is meant to give me some confidence of where the company could go in the next five years or so ( it wont be linear, I understand that too). Its not meant to give me false precision, rather some directional sense of where the company might be going.
All of this is obviously only useful once you have reasonable confidence in a company’s product, its leadership and market presence.

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And this is very similar to TomE’s (TMF1000, for those that were around and remember him) “buying at better value points” method (only using it more with P/E’s in more established companies), that I employed for many, many, profitable years, and have gotten back to more as my base LTBH investment strategy these days.

I wish TomE had been around through the 2020/2021 craziness, his consistent, sane voice may have saved me a lot of losses in 2022. I remember him commenting some on the profitless/hypergrowth companies saying to watch out, that they would have no floor if things go south for whatever reason, and I found out in the last 18 months that he was indeed right about that. Just didn’t want to believe it in the 5 years prior as the hypergrowth stocks didn’t have that issue… until they did.


Right Foodles, It was TomE that gave me the idea along with XMFRP.


@LifeOfDreamer this is a fantastic pattern of how things progress in life! Not that I like it, but amazing how well it depicts how we go through life on things.

I must confess I am in plain chaotic phase in terms of the information sources for my investing… so I was wondering if any of the seasoned investors here could share some of the distilled sources of info they use.

Me myself I have the Fool here, paying for some services, and Seeking Alpha. I tried others, but I was not really using them much. I am constantly evaluating options. Any tried and proved sources?

Of course, what works for you, might not work for me, so this is just to exchange experiences to amuse and enrich.

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I’ve been reading this thread and I kept thinking about Saul and his team. “This forum is to discuss companies” and “No posts about macro and such”. And then “We are among the most successful investors, we invest in the best companies, the issue is this perfect storm of COVID, post COVID, Ukraine war, energy crisis it is not our fault”.

Well, that is precisely the point, you don’t invest in a vacuum. You don’t discuss companies in a vacuum. Companies exist, succeed and fail within a given context and reality. There a tons of companies with great products that failed because they couldn’t cross the journey of reality. Like Marcus Aurelius and others said, you have to use reality to your advantage.

For example, have a look at this chart, and pay attention to XLK (technology) and XLE (energy). So if anyone pivoted from SaaS into energy, that person could be telling a whole different story.

Where I live we say “With Monday’s news anyone wins the war”. No one but a few geopolitical analysts could have predicted the war and its effect in the markets, but right after the fact everyone could have realized that energy prices will surge and then budgets for anything else will be stretched, a ton of tech spending was pulled forward so guess where the money for the energy price rise will come from. So perhaps let’s pivot a bit from SaaS into energy. And have a discussion about that. I don’t know if this happened, I definetely was not smart enough to even consider it.

My lesson from this is that it is really difficult to be a real investor, takes a life, but I should be more open to use reality vs fighting against it.

So I do see Saul and his team are very smart, but they are failing at seeing the whole picture.


Nicely put, Will. I could not agree more.

I understand that a board has to have rules of decorum, guardrails etc.

However, when one sees the world (investing world in this case) in plain black and white, without paying attention to the possible shades of grey, then one gets blind to reality and its unforeseen possibilities. As we have seen 2021, 2022 and now 2023 play out.

I consider the Saul style as momentum trading. It is not investing. They get in and get out of stocks based on quarterly results without paying attention to the broader macro conditions, business cycles and company fundamentals. This hurt their results in 2022 and ensured that they missed most of the 2023 rebound. Now there is nothing wrong with trading. But be up front and acknowledge it, declare it and make sure that all the new readers who flocked to the site know that is what they are reading about.

I have always been amused by the “we cannot control macro therefore we will ignore it”. Enough said on that.

Finally, one of the biggest mistakes that Saul made with his board was that he failed to realize that he had the opportunity to create a community where all ideas were welcome. Online boards can become places of learning…if you nurture it and allow it to become so. Unfortunately, Saul decided to stamp out new ideas and thought. Best indication of this…there have been very few new company ideas presented on that board for many months.

And history has shown us time and again what happens to societies and communities that stifle new ideas, discussion and dissent…they fizzle out and people seeking knowledge go elsewhere.