Time Frame of Valuation through DCF
Hi, I'm a beginner and I know this is a stupid question, but I just started making DCFs. I was wondering what the time frame on the share price given to a stock by the DCF is, and how to change it. For example, if I wanted to create a 3-year price target, would my price target just be what the DCF says is the fair price, but with only 3 years worth of projections? I just don't know because I thought DCF would tell you the fair price of the stock now, not in the future. So, how do you use it to create a specific 3 or 5-year price target?
The time frame of your DCF comes down to your judgment. It's a function of:
1) How many more years you think the company will take before it reaches terminal growth
2) The quality of your data which affects your ability to project a number of years of cash flows with reasonable certainty.
On 1), you can model multi-stage DCFs as well, if you think that can reflect a more realistic growth trajectory. Few years of high growth which tapers into a couple years of moderate growth before it finally reaches terminal growth.
Btw, markets price in a number of years of DCF. You can back out how many years the market is pricing in by doing a reverse DCF
Just add or take away years from your DCF?
You're right, your model gives you an estimate of what the stock is worth. That says ntg abt when the price will catch up to that value. Think abt it - when you get someone to appraise your house or a piece of art in your gallery, you only get a value. So when projecting 3 or 5-year PTs, it will come down to things like your expected catalysts which will help the market realize its mistake. Let's say you expect your catalyst in a year, so your DCF will be your 1 year PT.
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