Hockey stick
DCFA forecast where flat or declining history suddenly turns into steep growth, with no mechanism explaining the inflection.
The hockey stick is the most recognisable failure in forecasting: several years of ordinary performance followed by a sharp upward bend beginning conveniently in the first forecast year.
It is usually a symptom rather than a lie. Management forecasts are built from plans and targets, and plans assume everything works; the aggregate of many optimistic assumptions bends upward.
The test is mechanism. If margin expands, name what causes it and when the cost falls out. If growth accelerates, name the product, the market or the customer. An inflection with no operational cause behind it should be flattened.
It matters because the terminal value is built off the final forecast year, so an unjustified bend in year three compounds into the largest component of the valuation.
Worked example
Historic revenue growth ran 3%, 2% and 4%. The forecast shows 4%, 12%, 18%, 20% and 20%.
Ask what causes the bend. If it is a product launching in year two, model that product explicitly with its own ramp. If nobody can name a cause, flatten it.
It matters because the terminal value is built off the final forecast year, so an unjustified inflection in year three compounds into the largest component of the valuation.