Part 4/13:
- Predict the Future:
The first and most important step is to model out the company’s future revenue streams and free cash flows for the next 10+ years. This requires deep understanding of the business’s core drivers—what products will generate revenue, how much money they will make, and what portion of that will become free cash flow.
- Calculate Discounted Cash Flows (DCF):
Once future cash flows are estimated year-by-year, they are discounted back to the present value using an appropriate rate—typically the company's cost of capital. This process accounts for the time value of money and risk, producing the "fair value" of the stock.
- Compare with the Current Price: