The entire idea of valuing companies using a discounted cash flow method is based on the premise that the value of a company is the value of its future cash flows, discounted by an appropriate rate to the present.
Now, DCF models provide a very elegant solution to the valuation problem. Simply plug in your implied growth rate, your starting cash flow and tadah! You have the intrinsic value of a company.
However, what most people do not realise is that DCF faces several challenges that can potentially overvalue or undervalue a company.
The first challenge is that DCF is extremely imprecise. Put in garbage and you get garbage valuation. Its notoriously hard to predict whats going to happen the next year, much less 20 years into the future. I would be very suspicious of anyone claiming to be able to do so!
Secondly, if you look at a discounted ......