The normal way to value a stock goes like this. Guess the growth rate, guess the margins, guess the discount rate, and out pops a "fair value." It always feels a bit silly. Change the growth guess by two points and the fair value can swing 40%. It's too easy to pick the answer you want and work backward.
The reverse DCF fixes that, and it's the reason we built one into Nakag.ai. Instead of asking "what is this worth?", it asks a much more honest question: what does the current price already assume?
The normal DCF, in one paragraph
A discounted cash flow model says a company is worth all the cash it will produce in the future, adjusted for the fact that money later is worth less than money now. You forecast the cash for some years, add a value for everything after that, discount it all back to today, and you get a number.
The trouble is the forecast. Nobody knows how fast a company will grow for the next ten years. So the output is only as good as a guess.
Flipping it around
A reverse DCF keeps the same math but runs it backward.
You start with the thing you actually know: the price. Multiply by the shares and you have the market value. Then you ask: how fast would this company's free cash flow have to grow, every year, for that value to make sense?
Now you're not guessing growth. You're reading the growth that's already baked into the price. Then you can judge whether that number is reasonable.
A simple example
Say a company made $1 billion of free cash flow last year and the market values it at $30 billion.
Run the reverse DCF and suppose it says the price implies about 9% growth a year for the next decade.
Now the question is concrete. Has this company grown free cash flow around 9% a year? Is its market big enough to keep doing that? Are margins expanding or shrinking?
If it's been growing 20% a year and still has room, 9% looks easy to beat, and the stock might be cheap. If it's grown 3% a year for five years, 9% looks like a stretch, and the price is betting on a turnaround.
You haven't predicted the future. You've just made the market's bet visible.
How we set it up on Nakag.ai
Sign in, open any stock page, and you'll see a line called "Growth the price implies." That's the reverse DCF.
We use the same fixed assumptions for every company, on purpose:
- a 10% discount rate
- a ten-year forecast
- 3% growth forever after that
Are those the "right" numbers for every business? No. A utility and a young software company deserve different discount rates. But using one set of assumptions for everyone means you can compare two companies directly. If one implies 4% growth and the other implies 15%, that difference is real and comes from the prices, not from me fiddling with inputs.
Right beside it, we show how fast the company actually grew over the last five years. That side-by-side is the whole point. Implied growth on its own is just a number. Implied growth next to real growth is a story.
When it doesn't work
A reverse DCF needs positive free cash flow to start from. If a company is burning cash, there's nothing to grow, and the method can't give a sensible answer. That's why you'll see it blank for many young or unprofitable companies.
It's also weaker for businesses with very lumpy cash flow, like some banks, insurers, or companies in the middle of a huge build-out. One odd year can throw off the starting point.
Why I like it
It keeps me honest. I can't fall in love with a story and invent a growth rate to justify any price. The price tells me what it expects, and my job is just to decide whether I believe it.
Most of the time, I don't have a strong opinion. But every so often, the implied growth looks way too low for a company that's been compounding for years. Those are the ones I dig into.
Chris
Nakag.ai
This post is for learning, not investment advice. Do your own research before you buy or sell anything.