Which factor can cause discrepancies between a DCF valuation and market price?

Discrepancies between a DCF valuation and market price often arise due to the assumptions made in the DCF model. In a DCF analysis, analysts must forecast future cash flows and determine an appropriate discount rate. These inputs are highly sensitive and can vary based on the analyst's perspective, market conditions, and economic forecasts.

For instance, assumptions regarding revenue growth rates, profit margins, capital expenditures, and changes in working capital can significantly impact the projected cash flows. Additionally, the choice of discount rate, which reflects the risk profile of the investment, can lead to differences if varying rates are applied by different analysts or if market conditions change.

Since the DCF model relies on these projections, any inconsistency or deviation from market sentiment can lead to valuation differences. Market prices, in contrast, are influenced by a broad range of factors including investor sentiment, supply and demand dynamics, and market trends, which may not align with the fundamental analysis provided by a DCF model.

Thus, the assumptions within the DCF model directly drive the valuation output and can lead to noticeable discrepancies when compared to the market price of an asset.