A valuation technique that asks what growth rate the current market price implies, revealing the expectations embedded in the stock price rather than projecting cash flows forward.
“The price you pay determines your rate of return. I start from what return I need, not from what the model says the stock is worth. Work backwards from the return you want, and the price becomes obvious. — Warren Buffett”
— Warren Buffett
Deeper Explanation
Standard DCF projects future cash flows and discounts them to determine intrinsic value. Reverse DCF inverts the question: given the current stock price, discount rate, and terminal assumptions, what precise growth rate must this company achieve to justify this price? This converts a vague "this PE seems high" judgment into a specific, answerable question — is the implied growth rate achievable? If a stock trades at a price that implies 25% annual revenue growth for 10 years, ask: has any company of this size sustained that rate? What is the base rate of success? Reverse DCF is particularly powerful for growth stocks with no current earnings, where traditional DCF requires too many speculative assumptions. Buffett's actual approach to valuation is essentially reverse DCF — he works backward from what price creates an acceptable return given normalised earnings power, rather than letting the model tell him what the stock is worth.
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