Reverse DCF: Deriving Market-Implied Expectations

Core Idea

Forward DCF: given assumptions, calculate a target price. The parameters can be adjusted arbitrarily and end up "serving the conclusion."

Reverse DCF: given the market price, back-solve the implied growth rate and translate "expensive" or "cheap" into a verifiable proposition.

The essential difference:

• Forward DCF outputs "fair value." It is abstract, and you can always be right, but your wallet will not get any thicker.
• Reverse DCF outputs "market expectations": specific, verifiable numbers that can be compared with reality.

Applicability

Necessary condition: base-year FCFF must be positive.

Applying a standard two-stage DCF to companies with negative FCFF, such as early-stage high-growth companies or companies in an asset-heavy expansion phase, produces meaningless results.

Alternative: use PS-implied revenue back-solving (see "Handling Special Cases" below).