What growth rate is the price assuming?
A normal DCF builds a fair value from growth and margin assumptions. The problem is you have to guess. A reverse DCF flips it: take the price as given, and back out the growth the market must be expecting. If that implied growth looks reasonable, the stock looks reasonable. If it looks impossible, the stock looks expensive.
How it works
- Start with today's price. The market price is the answer. We're solving for the question.
- Anchor the inputs. Use the company's real margins, free cash flow, and share count. Hold them stable.
- Solve for growth. Find the revenue growth rate over the next 5–10 years that makes the discounted cash flow equal today's price.
- Compare to reality. Is that growth rate consistent with the company's recent performance, its industry, and its size? If the implied growth is 25% per year on a $2T company, the price is making a heroic assumption.
Why reverse DCF is better than forward DCF
Forward DCFs are sensitive to assumptions you can't verify. Change the discount rate by 1% or the terminal growth by 0.5% and the "fair value" jumps 30%. A reverse DCF avoids this trap by only asking one question: given the price, is the implied growth believable? It's falsifiable. It's testable against the company's actual history. And it tells you exactly what you'd need to believe to own the stock at this price.
Run it on any stock
Theo Capital's Analyze tool builds the reverse valuation automatically. Enter a ticker and you'll see the implied growth, expectation pressure, and how today's price compares to the stock's own five-year valuation history.