The DCF is an alluring but dangerous way to value a company. It is alluring because it seems like a much more logical, first-principles way of valuing a company compared to slapping a market-based revenue multiple on a company's projected sales. It is alluring because it is precise.<p>It is dangerous because it is not accurate. DCFs are very sensitive to assumptions, and confidence intervals for most assumptions are very wide. Two DCF models with credible, but different assumptions can yield hugely different valuations.<p>DCFs are also dangerous because stocks are not valued solely based on fundamental cash flows. In startups especially, if you do a typical DCF with conservative assumptions, you will miss outlier returns when an acquirer's thesis hinges upon very aggressive assumptions or synergies that a DCF wouldn't capture. This happens all the time in biotech.<p>It is not true that DCFs are independent of how the market values things. Many key inputs into the DCF, especially the discount rate and terminal value, are calculated in part based on how the market values things.<p>In practice, investment bankers and investors use several different methodologies, all somewhat flawed, to triangulate around a valuation. Often the DCF yields the highest valuation of these methodologies.