How to compare DCF share price to market share price?


1 Answer(s)


Yasar. Thats always the case. The DCF share price and the market price rarely are the same. The DCF share price is basically based on the companys fundamental cash flows. The market price is based on many other non-quantitative factors such as investors emotions, macro economic factors, news about the company etc. Such factors cannot be factored into a DCF. Typically bankers could run sensitivity analysy in the discount rate, terminal value etc to get to the dcf share price that is close to the market price.

By making such tweaks you will also know what is the market expecting in terms of discount rate and terminal value to merit that hihher price. Then you can make an independent analysis and conclusion on is that possible. If you beleive its not and the market is overvaluing the stock then you short the stock, or if you believe the market is under valuing the stock then you can go long on the stock.

Btw, I am pretty impressed that you are taking all this effort to do all these analysis yourself.