Valuing a Lemonade Stand → Valuing Epic Games
Build your first DCF model and understand where valuations actually come from.
The €6 Billion Question
Real Madrid made about €800 million in revenue last year.
But the club is valued at over €6 billion.
Wait... that's 7.5x their annual revenue. Where does the extra €5+ billion come from?
The answer: it comes from the future.
The Big Idea: A Company Is Worth All Its Future Cash
Here's the single most important concept in valuation:
A company (or any asset) is worth the sum of all the cash it will generate in the future, discounted back to today.
That's it. That's the whole game. Everything else is just technique for estimating that number.
This approach is called DCF: Discounted Cash Flow.
Step 1: What Is "Cash Flow"?
Cash flow means the actual money that comes IN minus the money that goes OUT. Not revenue. Not profit on paper. Actual cash.
Example: A Gaming YouTube Channel
| Item | Amount |
|---|---|
| Ad revenue | +€5,000/month |
| Sponsorship | +€2,000/month |
| Camera equipment | -€500/month |
| Editor salary | -€1,500/month |
| Software subscriptions | -€200/month |
| Free Cash Flow | €4,800/month |
That €4,800 is what the owner can actually take home (or reinvest).
Warren Buffett once said: "Revenue is vanity, profit is sanity, but cash is reality."
Step 2: Project the Future (With Humility)
Example: A Lemonade Stand DCF
Current situation: Your lemonade stand makes €20/day profit, 200 days/year = €4,000 annually.
| Year | Growth Assumption | Cash Flow |
|---|---|---|
| 1 | +10% (you're getting better) | €4,400 |
| 2 | +10% | €4,840 |
| 3 | +5% (market saturating) | €5,082 |
| 4 | +5% | €5,336 |
| 5 | +2% (maintenance mode) | €5,443 |
Step 3: Discount It Back
Using a 10% discount rate:
| Year | Cash Flow | Discount Factor | Present Value |
|---|---|---|---|
| 1 | €4,400 | ÷ 1.10 | €4,000 |
| 2 | €4,840 | ÷ 1.21 | €4,000 |
| 3 | €5,082 | ÷ 1.331 | €3,818 |
| 4 | €5,336 | ÷ 1.464 | €3,645 |
| 5 | €5,443 | ÷ 1.611 | €3,379 |
| Total 5-year value | €18,842 | ||
Step 4: Terminal Value (The Tricky Part)
Your lemonade stand doesn't stop existing after 5 years. What about year 6, 7, 8... year 50?
We handle this with "Terminal Value" — a single number capturing all years beyond our forecast.
Terminal Value Formula
Terminal Value = Final Year Cash Flow × (1 + long-term growth) ÷ (discount rate - long-term growth)With 2% long-term growth and 10% discount rate:
Terminal Value = €5,443 × 1.02 ÷ (0.10 - 0.02) = €69,398 (at end of Year 5)
Discounted back: €69,398 ÷ 1.611 = €43,075Step 5: Add It All Up
| Component | Present Value |
|---|---|
| Years 1-5 cash flows | €18,842 |
| Terminal value (discounted) | €43,075 |
| Total Value of Lemonade Stand | €61,917 |
Your €4,000/year lemonade stand is worth about €62,000.
If someone offered to buy it for €50,000, you should refuse - it's worth more. If they offered €70,000, you should sell - you're getting paid more than it's worth.
Now Let's Try: Epic Games
Same process, bigger numbers. Using estimated €2.5 billion annual cash flow, 12% discount rate:
| Year | Cash Flow | Present Value |
|---|---|---|
| 1 | €2.625B | €2.34B |
| 2 | €2.835B | €2.26B |
| 3 | €3.119B | €2.22B |
| 4 | €3.274B | €2.08B |
| 5 | €3.373B | €1.91B |
| 5-year total | €10.81B | |
| Terminal value (discounted) | €19.5B | |
| Total estimated value | ~€30 billion | |
This is close to Epic's actual valuation of $31.5 billion from their last funding round!
Why DCF Is Powerful (And Dangerous)
Powerful because: It forces you to think about what actually drives value and makes your assumptions explicit.
Dangerous because: Small changes in assumptions = huge changes in value.
Watch This
If we change Epic's discount rate from 12% to 14%:
- Terminal value drops from €19.5B to €14.7B
- Total value drops from €30B to €25.5B
- That's €4.5 billion vanished from changing one number by 2%!
The lesson: Never trust a DCF's exact number. Trust the thinking process.
Investment Dilemma: The Roblox Problem
You're trying to value Roblox. But what do you project?
How an Analyst Would Think:
- Users is easier to track but doesn't capture engagement
- Hours shows engagement but doesn't mean spending
- Monetization is the direct link to cash but hardest to predict
Most pros would use a combination: Users × Hours/User × Revenue/Hour
The uncomfortable truth: Valuation is judgment, not math. The math just forces you to be explicit about your judgment.
AI Lab: DCF Builder
Prompt Template
Help me build a simple DCF model for [Company]. I need: 1. Current free cash flow (find or estimate it) 2. Growth assumptions for Years 1-5 (explain your reasoning) 3. A terminal value calculation 4. The final valuation Format it as a table I could put in a spreadsheet. Then tell me: Which assumptions matter most? If I'm wrong about those, how much does the value change?
Dinner Table Discussion
"What's a company you think will be way bigger in 10 years? What would have to be true for that to happen?"
This is projecting cash flows in disguise! If someone says "Tesla," they're implicitly forecasting growth in EVs, Tesla's market share, profitability, etc.
So What? The Investor Takeaway
You now understand where valuations come from.
When someone says "Roblox is worth $25 billion," they're really saying: "I expect Roblox to generate approximately $X billion in cash flows, discounted back at Y% interest rate, that equals $25 billion."
When you disagree with a valuation, you're really disagreeing with their assumptions.
The power move: When you hear a valuation, ask "What assumptions would make that true?" Then decide if you believe those assumptions.
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