Published: January 30, 2026

What Is DCF Valuation? The Intrinsic Gap Explained

Why Now

On r/ValueInvesting, posts are using DCF models to find 2026 picks. Cleveland Cliffs shows $21 intrinsic value vs market price. But most investors don’t understand what DCF actually measures.

TL;DR

• DCF calculates what a company should be worth based on future cash flows
• The Intrinsic Gap is the difference between DCF value and market price
• DCF requires assumptions, so it’s an estimate, not a prediction

The Intrinsic Gap Defined

Every stock has two prices:

• Market price — what investors are paying right now
• Intrinsic value — what the company should be worth based on future cash flows

The Intrinsic Gap is the difference between these two numbers. When intrinsic value exceeds market price, the stock may be undervalued. When market price exceeds intrinsic value, it may be overvalued.

What Investors Often Get Wrong

Most investors treat DCF as a precise calculation. What they miss is that:

• DCF is only as good as its assumptions. Small changes in growth rate or discount rate can significantly change the result.
• Long time horizons create uncertainty. DCF for 10 years out involves more guesswork than precision.
• Market prices reflect collective judgment. The gap exists for a reason — either the market is wrong, or your assumptions are.

Historical Anchor: 2000 Dot-Com Bubble

During the dot-com bubble, companies with no earnings had infinite DCF values using optimistic assumptions. The market priced dreams, not fundamentals. When reality set in, the Intrinsic Gap collapsed.

This doesn’t mean DCF is useless. It means DCF requires realistic assumptions, not optimism.

How DCF Works

DCF answers one question: If I could extract all future cash flows from this business, what are they worth today?

The calculation involves:

1. Projecting future cash flows — usually 5-10 years
2. Estimating a terminal value — what the business is worth after the projection period
3. Discounting to present value — adjusting for the time value of money

What Would Change My View

If research emerged showing that DCF-based strategies consistently outperformed simple metrics like low P/E ratios, I’d reconsider the complexity of DCF analysis. However, DCF remains valuable for understanding qualitative factors that ratios miss.

Bottom Line

For value investors, DCF provides a framework for estimating intrinsic value, but the Intrinsic Gap requires judgment to interpret.

This doesn’t apply to everyone. Growth investors and short-term traders may find DCF less useful.

The rule to remember:

“DCF tells you what a company is worth; the market tells you what others think it’s worth. The gap is where opportunity lives.”