Discounted Cash Flow Valuation: Spot Undervalued Stocks Fast

Discover the basics of discounted cash flow valuation, contrast relative and absolute methods, and apply the free cash flow to equity approach to assess a stock’s fair value.

Learn the six steps of discounted cash flow valuation—from forecasting five-to-ten year free cash flows to applying the discount rate and computing perpetuity value, ending with intrinsic value per share.

Project five-year free cash flow under a discounted cash flow framework, using revenue growth, operating margin, taxes, depreciation and amortization, capex, and working capital changes.

Calculate the discount rate using the weighted average cost of capital to value free cash flows in a discounted cash flow analysis, incorporating risk-free rate, beta, and equity risk premium.

Calculate the perpetuity value to capture post five-year cash flows, using the latest year FCF, GDP growth, and the discount rate to determine the Umbrella Corporation's terminal value.

Discounting cash flows and perpetuities, calculate present value and terminal value to determine a company’s enterprise value, using the given free cash flows, discount rate, and perpetuity value.

Adjust the enterprise value in step five of the discounted cash flow valuation by subtracting debt and adding cash. Use this fair value to determine the intrinsic value per share.

Compute the per-share intrinsic value from discounted cash flow, compare with market price, and use valuation ratios to spot undervalued or overvalued stocks.

Calculate Nike's projected five-year free cash flows using conservative 10% revenue growth, 13.6% operating margin, 20% tax, and rising depreciation, capex, and working capital for a discounted cash flow valuation.

Calculate Nike's present value of its free cash flows using the weighted average cost of capital as the discount rate.

Calculate Nike's perpetuity value from year-5 free cash flow of about 4.2 billion, using a 6.37% discount rate and 2.6% US GDP growth, yielding about 114.3 billion.

Adjust the enterprise value by subtracting debt and adding cash and cash equivalents to estimate Nike's fair value, laying the groundwork for valuing one share.

Use a discounted cash flow analysis to calculate Nike's intrinsic value per share, revealing a fair value of 101.5 billion dollars, 61.54 dollars per share, and about 19 percent upside.

Compute Novo Nordisk's free cash flows over five years by applying a 9.5% revenue growth, 40% operating margin, and 23% tax rate, before adjusting for depreciation, capex, and working capital.

Compute Novo Nordisk's discount rate using the weighted average cost of capital. The lecture covers cost of equity, after-tax cost of debt, risk-free rate, beta, and equity market risk premium.

Calculate perpetuity value for Novo Nordisk using year five free cash flow, a 6.97% discount rate, and US GDP growth, then discount it to present value in the next video.

Calculate enterprise value by discounting five years of free cash flows at 6.97% and deriving the terminal value from perpetuity, then sum present value and terminal value.

Subtract debt from enterprise value and add cash and cash equivalents to reveal equity value and the intrinsic value per Novo Nordisk share, enabling quick undervalued stock spotting.

Compute Novo Nordisk's intrinsic value per share via discounted cash flow, yielding 363.90 Danish kroner. Reveal the current price of 278.80 kroner, implying about 30% upside and an undervalued stock.

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