From Stephen Penman: “I am not a fan of DCF valuation. It discounts free cash flow with that elusive discount rate, but the problem is worse. Free cash flow is not a measure of value added; it is not appropriate accounting for value. That’s easily seen. Free cash flow is cash from operations minus cash investment, so investment reduces free cash flow and liquidation increases free cash flow. That’s perverse. I can show you a number of very profitable firms that have negative free cash flows because they invest a lot to take advantage of their profitable opportunities. DCF works for long forecasting horizons, but that leaves you speculating about the long-term, or guessing at the “long-term growth rate.” Plugging in an assumed growth rate into a DCF model is dangerous; it results in a speculative valuation that rides on a (speculative) growth rate.“
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