DIY Stock Valuation: Estimate Fair Value with DCF & Multiples

Key Takeaways

• Discounted cash flow (DCF) converts future free cash flows into a present intrinsic value using a discount rate and terminal value.
• Valuation multiples (P/E, PEG, EV/EBITDA) provide quick market-based cross-checks and are useful for relative valuation versus peers.
• Inputs, growth rates, discount rate, terminal growth, and margins, drive most of the DCF outcome; perform sensitivity analysis on these.
• Combining DCF and multiples, and comparing multiple scenarios, produces a more robust fair value range than any single point estimate.
• Use company filings, consensus estimates, and simple spreadsheets or online calculators to implement a valuation workflow efficiently.

Introduction

DIY stock valuation teaches investors how to estimate a company's fair value using two complementary approaches: discounted cash flow (DCF) analysis and comparative valuation multiples. DCF seeks to model the company's intrinsic value from expected future cash flows, while multiples express value relative to earnings or cash flow and peer benchmarks.

This matters because a reasoned fair value estimate helps investors separate price from value, set target ranges, and make disciplined investment decisions. You will learn practical steps, input selection guidance, a worked DCF example using $AAPL, and how to use multiples as a sanity check.

What's covered: how to build a simple DCF, choosing discount/terminal assumptions, common multiples (P/E, PEG, EV/EBITDA), sensitivity testing, tools and data sources, and mistakes to avoid.

1. Building a Simple DCF: Step-by-Step

The DCF method values a firm by forecasting its free cash flows (FCF) and discounting them back to present value. For an intermediate investor, a simplified DCF with a 5-year explicit forecast plus a terminal value is practical and informative.

Step 1, Start with a recent free cash flow

Free cash flow (FCF) is typically operating cash flow minus capital expenditures. Use the company’s latest cash flow statement or a reliable data provider. For our example, assume $AAPL has FCF of $90 billion (rounded) in the most recent fiscal year.

Step 2, Forecast 5 years of FCF

Choose realistic growth rates informed by historical performance, management guidance, and analyst consensus. For a baseline, many analysts use higher near-term growth that converges toward a lower long-term rate.

1. Year 1 growth: 8%
2. Year 2, 5 growth: hold at 8% for simplicity in the worked example

Using FCF0 = $90B, Year 1 FCF1 = 90 * 1.08 = $97.2B. Repeat compounding for years 2, 5.

Step 3, Select a discount rate

Discount rate often approximated by the weighted average cost of capital (WACC). For many large, diversified tech firms a common starting point is 7, 10%. In this example use 8% as a round, illustrative WACC.

Step 4, Calculate terminal value

Terminal value captures continuing value after the explicit forecast. The Gordon Growth model is common: TV = FCFn*(1+g)/(r-g). Choose a conservative terminal growth rate (g) around long-run nominal GDP or lower, often 1.5%, 3.0% for mature companies. We'll use g = 2.5%.

Step 5, Discount and sum

Discount each forecasted FCF and the terminal value to present value and sum them to get enterprise value (EV). Subtract net debt (debt minus cash) to derive equity value, then divide by shares outstanding to reach per-share intrinsic value.

Real-World DCF Example: $AAPL (Simplified)

This worked example uses round numbers to show mechanics, not as a live recommendation. Inputs are illustrative; substitute current company values and your own assumptions when you build a model.

• Starting FCF (year 0): $90B
• Forecast growth (years 1, 5): 8% annually
• Discount rate (WACC): 8%
• Terminal growth rate: 2.5%
• Net cash: $70B (cash minus debt, illustrative)
• Shares outstanding: 16B

Forecasted FCFs: Year1 = 97.2, Year2 = 105.0, Year3 = 113.4, Year4 = 122.5, Year5 = 132.25 (all $B).

Terminal value at end of Year 5: TV = 132.25*(1.025)/(0.08-0.025) ≈ $2,464.6B.

Discount each item at 8%: with these assumptions each year's PV simplifies (because growth ≈ discount rate), Year1, 5 PVs each ≈ $90B, so PV of explicit years ≈ $450B. PV of TV: 2,464.6 / 1.08^5 ≈ $1,677B. Enterprise value ≈ $2,127B.

Add net cash of $70B to get equity value ≈ $2,197B. Divide by 16B shares → intrinsic value ≈ $137 per share. This number depends entirely on the assumptions; small changes in discount rate or terminal growth move the result materially.

Sensitivity check

Run a sensitivity table for discount rate (7%, 9%) and terminal growth (2.0%, 3.0%). For example, a 0.5% lower discount rate increases PV of future cash flows substantially. Sensitivity analysis transforms a single-number output into a defensible value range.

2. Comparative Valuation: Multiples as a Cross-Check

Multiples provide market-implied valuations and help sanity-check DCF outputs. Common multiples include P/E (price-to-earnings), PEG (P/E to growth), EV/EBITDA, and Price/Sales for early-stage firms.

P/E and PEG

P/E is price divided by EPS. PEG = (P/E) / (growth rate as percent) provides a rough way to relate valuation to growth. If $AAPL trading at P/E 28 and expected earnings growth is 8% annual, PEG = 28/8 = 3.5, higher than a rule-of-thumb 1.0 suggests the market prices a premium for other attributes.

EV/EBITDA

EV/EBITDA is useful because it uses enterprise value and excludes capital structure differences. Compare a firm's EV/EBITDA to peers in the same industry to determine whether it trades at a premium or discount.

How to use multiples

1. Collect current multiples for the target and its peer group (use sources like company filings, financial terminals, or public data on sites such as Yahoo Finance).
2. Adjust for differences in growth, margins, and capital intensity, higher growth typically justifies higher multiples.
3. Apply a peer median multiple to the target’s earnings or EBITDA to get a relative value estimate.

Multiples are faster than DCF but more dependent on market sentiment and peer selection. Use them as a reality check rather than a sole valuation method.

3. Practical Tools, Data Sources, and Workflow

A reproducible workflow and the right tools will make DIY valuation efficient. A simple spreadsheet plus a few online resources is enough for most retail investors.

Essential inputs and where to find them

• Free cash flow, earnings, and balance sheet items: company 10-K/10-Q filings and cash flow statements.
• Analyst consensus growth and estimates: Refinitiv, FactSet, Bloomberg, or free alternatives like Yahoo Finance and Seeking Alpha.
• Debt and cash figures: company filings and balance sheets.

Tools and calculators

• Spreadsheet (Excel or Google Sheets) with basic present value functions, recommended for transparency and sensitivity tables.
• Online DCF calculators for quick checks (e.g., GuruFocus, Simply Wall St, or brokerage-provided tools).
• Charting tools to compare multiples across peers (many brokerages and financial sites provide peer group screens).

Document assumptions, date-stamp data pulls, and save scenarios (base, conservative, aggressive). This makes valuations auditable and reusable.

Common Mistakes to Avoid

• Overconfidence in a single “best” estimate, run multiple scenarios and show a range.
• Using unrealistic growth or terminal rates, anchor terminal growth to long-term economic growth expectations (typically <3%).
• Ignoring capital structure differences, use EV-based multiples when comparing companies with different leverage.
• Copying consensus blindly, consensus can be wrong; understand the drivers behind analyst estimates.
• Neglecting sensitivity analysis, small changes in discount rate or terminal growth can produce large swings in value.

FAQ

Q: How do I pick a discount rate for a DCF?

A: The discount rate is often the company's WACC, reflecting cost of equity and debt weighted by capital structure. For a quick estimate use a range (e.g., 7%, 10%) appropriate to company size, volatility, and industry; compute sensitivity across that range.

Q: When should I prefer multiples over DCF?

A: Multiples are faster and useful when cash flow forecasts are highly uncertain (very early-stage firms) or when you need a market-based sanity check. DCF is better when future cash flows can be projected with reasonable confidence.

Q: How important is terminal value in a DCF?

A: Terminal value often represents the largest portion of a DCF for mature companies, sometimes over 50%. Because it relies on long-term assumptions, validate it with conservative growth rates and cross-check using multiples.

Q: Can I rely on analyst growth estimates?

A: Analyst estimates are useful inputs but verify the assumptions and compare across sources. Use them as one input among historical trends, management guidance, and your independent scenario analysis.

Bottom Line

Estimating fair value is both art and science. DCF provides a theoretically grounded intrinsic estimate, while multiples supply market context and speed. Neither method is perfect alone; combined, they deliver a defensible value range and highlight key assumptions that drive outcomes.

Actionable next steps: build a simple 5-year DCF in a spreadsheet for a company you follow, run sensitivity tables for discount and terminal growth, and cross-check with P/E and EV/EBITDA multiples against peers. Document assumptions and iterate as new data arrives.

Valuation skills improve with practice. Use this framework to make your analysis systematic, transparent, and repeatable rather than relying on gut instinct or single-number targets.