How to Calculate Intrinsic Value (Apple Stock Example)
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- เผยแพร่เมื่อ 15 ต.ค. 2024
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Watch an updated Apple valuation here!
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Download the spreadsheet template below:
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Being able to confidently value a stock is essential in value investing. We need to be able to identify those 50 cent dollars and grab that margin of safety as it presents itself!
I hope this video gives you all a good example of Phil Town's 'Margin of Safety' valuation method.
Recommended Investing Books:
Rule One by Phil Town:
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Payback Time by Phil Town:
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The Intelligent Investor by Ben Graham:
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The Dhandho Investor by Mohnish Pabrai:
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The Education of a Value Investor by Guy Spier:
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Recommended Personal Finance/Entrepreneurship Books:
Rich Dad, Poor Dad by Robert Kiyosaki:
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Tools of Titans by Tim Ferriss:
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Disclaimer:
I am not a financial adviser. This video is for education and entertainment purposes only. Seek professional help before making any investment decisions.
#stocks #intrinsicvalue #valueinvesting
Watch an updated Apple valuation here!
th-cam.com/video/cI8ZSf0nkFs/w-d-xo.html
please how did you do the excel thing in minute 8:27 when you pull the formula and it gets applied on the rest of the cells ?? please
@@ahmedlemhar move your mouse pointer to the bottom right corner of that cell, your mouse pointer will become a "+", then just click and drag it
hello Tom, Please could you explain where you obtained the 15%(percent) minimum rate of return? where and how did you come to this figure? your reply would be greatly appreciated
JSB Management copies straight from Phil Town’s books 🙂
@@ericchow2024 Thank you so much Eric :)
I appreciate your approach to teaching.. To my understanding this just proves how much we need an edge as investors because playing the market like everyone else just isn’t good enough, we just need to hold onto our hopes and wait to see how things turn out because market movements are almost always unpredictable. In my portfolio, I'm noticing more red than green.
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Wow; everyone just talks about valuation but that’s where they stop; you took it all the way. Great job! Thanks for educating me/us
Isn't the EPS of 11.89 shown in the video too high?
Right now its 3.28 what's up with that?
@@landro3552 The Apple stock was split on a 4-for-1 basis on August 28, 2020.
I did a valuation of Dell today and it came out at $34.35 meanwhile Dell is trading at $81.07 either I made a massive calculation error or it's overvalued by over 2x
@@JosephDickson This is normal in the current environment. If you do a stock valuation for Tesla you will be mindblown at how overvalued the stock is. A lot of people invest in stocks for dumb reasons. "I like this product" or "This is the next big thing" are common reasons people invest and very few investors dive into financials. You also have to take into account competitive advantages some companies may benefit from that artificially inflate their value, like government interventions which benefit certain companies and cripple competitors.
@@JosephDickson The math doesn’t seem to make sense. It’s basically saying that if growth rate is greater than expected rate of return multiplied by your margin of safety, then the stock will be overvalued. In this case 12% > 15% * 50% or 12% > 7.5%, thus stock overvalued. So in this video it makes it seem that growth rate = to your expected rate of return, which is an incorrect way to valuate a company. You don’t need P/E. That just throws every one off. Here’s a quick check of the formula:
Compound Formula: FV = p(1+i/100)^n
FV = Future Value of EPS
P = Present Value of EPS
i = interest rate
g = growth rate
n = number of years
We’re using 9 years since year 1 to year 10 is 9 years not 10 years from now, not 10 from now.
FV = p(1+g/100)^9
FV = 11.89 (1 + 12/100)^9
FV = 11.89 (1.12)^9
FV = $32.97
Now we do the reverse with interest rate of 15% to calculate starting EPS or p:
FV = p(1+i/100)^n
FV / (1+i/100)^n = p
P = 32.97 / (1.15)^9
P= $9.37
Multiply $9.37 by the P/E and you get $145
So P/E has absolutely no relevance in this formula. So he’s simply using compound interest formula and comparing the Growth rate with your expected rate of return. Makes no sense. That’s not how you valuate a company. Otherwise, we’d only be looking at EPS. Hope this sheds some light :)
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This is why Buffet tells us that you don't have be really smart, just very patient. Very good video! Thank you for creating this in a step-by-step process. Most investors know to buy under value, but it's getting the intrinsic value is part of the critical key in knowing when to buy.
Thank you for your breakdown and not requiring people to download a spreadsheet. I wanted the math and you provided it. Thank you, I appreciate you.
I commented on this video around 8 months ago and said it’s impossible to get good stocks with this evaluation. After the recent events I’d like to say i was dead wrong and i am using this formula from here on out. Thank you for your work.
It works great if you are willing to stay out of the market for 10 years at a time.
Update @logan cheek
@@uztrtrwhu3678 The update is OP is down on his investments lmao
@@darthrex6267 what does that mean, i forgot what the video is about
@@darthrex6267 o now i get it, update @logan cheek
man this really cooks my brain
Hi Tom, Thank you for keeping it so simple I finally got the discounting math part and Im so happy thanks to you. I can tell you are going to go pretty far!
There's a function in Excel called NPV, Net Present Value, that does this for you.
Amazing ! Simply not overly complicated and easy to understand, no courses being offered just straight value ,,,,u sir are the hero we all need in this get rich quick market !
Thanks for this video! The easiest valuation video I've watched.
This is first time that I find really one useful youtube channel. Great!
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@@mihaeldoncevic9704 E-Toro
Amazing example of a simple discounted cash flow model. Congratulations for your objectivity.
Hi Tom, randomly fallen on your video looking for a clear explanation of Phil Town's Rule 1 method of intrinsic value and so far I admit you made the clearest and smoother explanation about it. Thanks again for your insight!
Many thanks for giving the spreadsheet template
This is really amazing, however, can you please tell me how to apply this in case if a company EPS is in negative as. As I am stuck in one of the stock & wanted to exit the position but wanted to do the quick analysis for deriving the future stock value. So that I can decide whether to hold that stock or sell it.
Following
What industry
Any dividend
I'd rather estimate the Enterprise Value (EV) and then derive the fair share price value from there. Equity value = EV - net interest-bearing debt, and to get to the fair equity value per share (i.e. "future stock value") you divide by shares outstanding. The question is then, how to estimate EV? You could check the industry's multiples, such as EV/EBIT or EV/EBITDA, or you could do a DCF analysis based on expected free cash flow generation in the future.
I think for a negative EPS you wouldn't have a p/E ratio, you could use the price to book ratio. But yeah what value would you put into EPS would probably be what you project yourself. Maybe just use some best case EPS you find online (i.e whenever it comes to positive)
Did you ever figure this out ?
There's NOTHING MORE IMPORTANT when investing than being able to calculate intrinsic value, knowing if a security is trading at a discount to that value at the moment, and knowing your margin of safety/maximum buy price. Keep in mind, valuation IS AN ART. It's not all science and math. So you have to give yourself some wiggle room, and the price of securities is always subject to buyer sentiment. Good video!
Finally someone who knows what they’re talking about, as a fellow finance person I really appreciate you showing people the real deal, instead of those fake gurus who I’m not entirely sure if they’ve ever studied finance at all. Great video!
Thank you, do you have a video where you discuss different method of calculating and so on.
Thank you for your help! I just did a valuation of Apple using this method today (5-24-22) and got to a margin of safety price of $36. The last time it was at that price was December 2018. Buffet, with his analysis, saw a buy at $150/share. Even if we didn't use a margin of safety, the current value price would be $73. It may take years (if ever) for Apple to get back to that price. And if it did, it would seem that Apple would be in some serious trouble. If investing for the long term, when can you say, "that price is good ENOUGH"?
Insights?
When it’s within your margin of safety. This formula is for finding value in companies that are undervalued. Apple is not undervalued currently.
Thank you for the insightful video. I'm 27 and I just started investing, I would like to know more about compounding interest in investing. I believe it's an essential concept to understand for long-term financial success.
Finally understood the DCF intrinsic value calculation - thank you!!
Thanks a lot, it took me ours to follow the example on paper manually but it helped. I hope to do it for many companies to master it
Thanks for simplifying it, the trouble with calculating intrinsic value is it’s a very subjective exercise. Investor should prepare their portfolio for 2021, as the stock market enters the final stretch of the year, it's worth looking back on your portfolio to consider what's still working and which strategies are at risk of falling behind.
Investors seeking to reposition their portfolio should consider ABBV, BKR, CF, COLB, KIM
My best value stock this past months are BPYU, NRG, ARD, NLOK, EAF.
Hi I’m trying to get into stock trading and investment, what do you say the most important thing to look at when buying stock?
A great opportunity to increase the income diversification of an investment portfolio can be provided with dividends that pays.
@@kumarvenkatesh6600 Don’t judge a stock by its share price, entering and exiting a trade at the right moment requires patienc. And most importantly ensure you thoroughly carry out research on company and make common-sense decisions before buying stocks.
Absolutely. Investors need to diversify their investment.
best video on calculating Intrinsic value in my opinion....simple yet effective, thank you..... this helped a lot with buying decisions..... thumbs up!
JET MB I think my newer one is much better, but thanks!
Hey Tom. Great video! Thanks for making this extremely easy to follow.
Quick question for you - Is there any reason we do not use the current P/E Ratio listed on the day of our valuation? In your method you either use double the current price per share or the average. Does your method provide a more accurate intrinsic value figure?
Thank you Tom. Great explanation of valuation. Thanks for the excel download.
There was FANTASTIC value in this video
Finally understood the DCF intrinsic value calculation - thanks so so much😂
In such times as this, you’ve got to make sure you consider having a diverse investment strategy. Your portfolio should have exposure to different areas of the market, including small or large-caps of ETF index, international stocks, grade bonds and alternatives like currency market (forex & digital-ledger) as this will help manage the overall risk on your portfolio
Dave Gustavo
This is smart trading I haven’t seen anyone mention this on TH-cam. I would like to have my account working in the same method.
Probably Dave has more investments and savings. But you’re right, putting all your income into one place is also risky. Diversifying is the best option right now
If you invest aggressively over the long run he will get better returns. You will be able to generate consistent passive income
In the meantime this is presenting an insane opportunity for new investors or those sitting with cash waiting. To set themselves up in a good spot. Even investing in TSLA, bitcoins the volatility market at the moment.
Generally I prefer trading this way dave it ensure lucrative expectations
I feel like I've seen all the intrinsic value calc videos out there by now (!) and this is by far the best and best explained. So grateful for your efforts. Thank you thank you thank you :) Will definitely subscribe.
Thank you for your videos. This is great. Quick clarification question- why would you use the lower P/E number if you are value investing? Wouldn't it make more sense to use a higher P/E to be conservative on the investment?
Great job making this video! I followed it up making my own google sheet and making the formulas there at the same time. Thank you!!
Excelent video thank you! Love how you spell it out step by step, looking forward to the updated version
Tom you are a legend. you helped me so much understanding intrinsic value better than my lecturer. Thank you!
Hi, I'm new to investing and have a quick question. Why do you multiply the 10 year number by the P/E ratio? Aren't large PE ratios and indicator of an overvalued company?
Yes, I’m curious too?
You described/ explained this far better than anyone else I have seen on TH-cam so far!
Hi! Good video. However, what I see is that in your model it is useless to calculate the EPS along the 10 years, as you just take the current EPS and multiply by current P/E ratio, and you get the actual price of the stock. What the real "intrinsic value" of company is, is the total growth difference of EPS within the next 10 years, which you then can subdivide into growth of your book value and the total amount of dividends. It makes also more sense, as this is the maximal price which you should be willing to pay, because it equals to 10 years growth of EPS. And therefore, you should not buy something over this price, as you would make a loss. More advanced models apply also a discounted rate. So, every year the particular annual EPS is devaluated by the discounted annual factor of 1/(1+p)^y, where p is the interest rate (should be at least higher than the devaluation rate of the currency) and y is the particular passed year. For normal long term value investing I am using 2%, and for more aggressive investing I am going until max. 10% pa. Because, the money you are getting in 10 years has a way less value to you than money, you will receive within the first 5 years.
Heyy I'm actually trying to understand investing for the very first time, and I would appreciate if you could tell me where you learnt this from so I could learn it there too 😭
Thanks for the amazing video. I'm 23 and just started investing. l'd like to learn more about compounding interest in investing. I believe it's an essential concept to understand for long-term financial success.
Hi, how can I use this method if the company has negative earnings per share but a positive growth rate?
Use a different method
@@TechnoBacon55 yes thank you which one would you recommend
@@banksgraves5509 I wanna know as well
@@TechnoBacon55 lmao thanks for that enlightening answer
I'm a noob too but I believe a stock like that would be considered a "growth stock" and valued differently. If I understood this correctly, this is used for "value stocks". There are different categories for that reason... I think 🤔
Thanks for that! Very helpful. Does this formula still apply in 2022? According to your calculation Apple should be bought below $40 as of today which seem crazy for the stock to drop that low
I did this on multiple top stocks yesterday that I’ve been following (including Apple) and it basically said every stock is incredibly overpriced/overvalued right now and I shouldn’t buy... Still thank you for the evaluation tool!
Try oracle and let me know what you think. I got 81.06 to buy on the sheet i think oracle is around 61 dollars. Im sure that means a buy but not quite sure to press the buy button.
Thanks Lot. I agree with comment below, you have taught how to do it. Great insight.
my friend you are the men. i have watched so many videos trying to find this and you need a PHD. thanks man.
a Phd??? Every commerce graduate knows a whole lot of this stuff.
I followed this technique and invested when the pandemic started in April 2020 and wow... gone on to make some serious money! Thanks for the video Tom!
Nice one :)
...or in a much easier way of getting the same answer: it is growing at 12% but you want a 15% return, so multiply the current price by (12/15). It is simple and gives you the same answer without the work.
Current price of $181.25 * (12%/15%) = $145.
Hi,
Where do you get that 181.25 ?
If I am not mistaken the formula in this video is eps*per*((1+GR)/(1+MRR))^9
He gave an example
Correct me if I'm wrong, but isn't your method too oversimplified? Tom's calculation takes into account EPS ttm which is important when determining intrinsic value as EPS ttm can be in the negative (more spending than income).
@@lloydmace3546 Shouldn’t the formula be eps*per((1+GR)*(1-MRR))^n (if n is the amount of years) though?
Bro, this is an amazing video. I used to use Phil Towns calculators but yours example is amazing. Only thing I can't understand how to find Growth Rate if not to look in yahoo, there was some sort of formula also how to get it correctly, and than you choose which of to is lower, the one you got or the one in yahoo...
that was amazing - thank you. Do you have time elect a stock valuation model to analyze a stock and make a recommendation? I was thinking of Amazon and how it's operating in today's market (giving the pandemic).....
First time i ever commented on a TH-cam video. Was really great info. Especially for people who are starting out. Thanks
Two thumbs up, great content and verifiable by those in the know. Thanks!
Drone Ninja thanks for watching 🙂
Great explanation! I read Rule #1. Good job
Tom, I am sure that there are many other viewers note that the forecast MOS buy price from this calculation looks to be very low and unrealistic for some companies as shares prices have not been this low in 10 years. One point that I make, using the TTM EPS is a snap shot in time and may contain limited view (in light of the recent pull back). Would an average EPS for prior 5 years be more realistic?
thanks from India, this is video is very much helpful
Does this stock valuation take into account the time value of money? I know for other forms of intrinsic valuation, like DCF for example, discount earnings or cash flows to the present because money in the future is worth less than today. I honestly might be missing something, but if this method does not include some sort of discounting, wouldn't that pose a problem regarding the accuracy of the intrinsic value result? I'm sort of new to this stuff so I might just be thinking too hard lol.
The minimum rate of return is the discount rate
It would. This formula doesn’t take into account inflation or opportunity cost of having money locked in, however, I still think it represents a good place to start.
What a fantastic video. Simple and easy to understand
Never forget to compare the value of Apple stocks when Warren buffet actually purchased the stocks Vs their value now. For the quick of mind: if Berkshire has it in portfolio today doesn:t mean they would buy it at today's value
Thanks for your video,I was able to follow along, until you started to use formulas in Excel Spreadsheets,which I have absolutely no knowledge of (I'm an old geezer) !
You can now download the spreadsheet by following the link in the video description :)
What if the stock has a negative earnings per share? There are a lot of value stocks with negative earnings per share.
David McCrary made a video on this a few weeks ago!
David McCrary can you take a look at Tesla please ...its having a very big growth rate en P/E
PLEASEEEEE break down TSLA!! Ive been wanting to buy in, but the price keeps soaring!
Andy T I’m afraid all the Tesla fans won’t like my opinion on the price!!
Thanks mate excellent and simple explanation. Cheers from Melbourne!
Why do you calculate the pe ratio by doubling growth or averaging out the last five years instead of just using what the ratio is right now?
Wakamz the very long term growth of the market has been around 7-8% and the long term average P/E of the market has been 15 (around double the growth).
We want to figure out what we could sell the business for in a good market so will use an average (or even higher end) historic P/E for the company.
Often we’re buying into companies when some sort of event has sent the share price way down in the short term, so the current P/E wouldn’t be a fair estimate of a future multiple.
Hope that helps 🙂
Great vid!
& shares spreadsheets for no cost - top bloke!
How would u calculate a negative/ up & coming company.
It would be great if u did a vid on this.
Thank u
Ah! The good old value investment. Gone are these days at least for the near short term. Everything is inflated right now and P/E and fundamentals are thrown in the garbage.
Look outside the american market. You can find some gems. Maybe without sexy names.
Yeah,everything is not really reflecting on the current state of economy its insane
Its because interest rates are so low. 10 year US gov bond rate is less than 1%. People are pumping money into anything that can give them a higher return.
that was really good. I learned a lot. Thanks Tom.
Thanks for the video. I've been reading Phil's books, and this was helpful. Can you share about how you locked in the cell and dragged the equations through the row, or can you share a good resource for these type of excel issues? Thanks again.
senno52 you can either manually type the $ signs or press F4 to lock a figure in. That just means that the cell used in the formula won’t change when you drag, but it will for anything that’s not locked in
Got it, many thanks!
Dude and what does the result mean? If the result is UNDER the current price then it means it is a must buy?
@@MrMadmaggot No the result should be higher than the current price for it to be a buy. Using a 50% margin of safety we would want the result to be 2x more than the current price.
@@valueinvestoracademy The result must be higher than the current?
Thank you for your good explaining
Don't you need to add the present value of each year's earnings to the present value of the terminal value?
I dont think so. Cz the price is relective of those earnings...just my view
It's very informative and thank you for share spreadsheet !!
currently the share price is $318 and after finding intrinsic value i get $155. does that mean it is over valued or i am doing something wrong
Got the same thing! Guess it's over-valued!
Keep in mind that this valuation is a raw example. If the stock is paying divs, you have to consider that in your calculation as well.
Lastly, companies growth rate tends to slow down in time, so you might want to take say 7-8% instead of 12 in the last couple of years of your projection
@@summer2011909 Also I think the brand name increases the value of the share, future plans, innovations...etc
good luck waiting until apple comes down to $155 share....It ain't gonna happen. I've used Phil's calculations during this crisis of 40-50% reversal on numerous stocks...ALL are overvalued and one 1 out of 50 might fit the criteria of buying @ .50 cents on the dollar. Sit on the sidelines with worthless cash and watch everyone else make money. No thanks. Find a fair price and go in.
Simplest evaluation method ever. Best!!!
Hi Brother, you excel sheet is great. do you have a Chat group or any platform to discuss ? maybe instagram group, WA group etc. thanks
Kris Hsu thanks for watching. Glad it’s useful! I don’t at the moment, but we could do that if there was enough demand
I used this formula to calculate buying Amazon today with a 50% margin of safety, and the result says if you can buy Amazon for less than $2,819.15 you'd be getting it a huge discount. I used the same numbers you used, the margin of safety 50% and minimum rate of return 15%. For the growth rate I put 34 and for the P/E ratio, I put double the growth rate which is 68. You'd think Amazon, as expensive as it is that it's overpriced, but according to this calculation even at $2,401 that it's at today, it's actually undervalued!
Thanks for this, well done! Just a quick question, shouldn't year 1 on the excel file be technical year 0 (which is the present)?
Froiland Timpoc that’s not how I’ve seen in taught, although I see what you’re saying
Agreed. I've just left a similar comment. But I'm not sure it makes any difference - it just means the projection period is 9 rather than 10 years.
Wow, i have been searching for this but everyone was hiding this information
You have explained it perfectly 👍
Bro, this was soooo helpful, can't thank you enough. :)
Simple explanation and thank you for showing an actual example via excel. Great video!
Why can’t I just use the P/E ratio shown in Yahoo Finance?
Thats usually just the trailing 12 month PE ratio. You want to consider the P/E ratio range that Apple can trade between and take the average. 2x Growth rate is surprisingly accurate.
Very good explanation of Town's confusing book. How reliable is this method though? i get a fair value of apple at $76 today
The numbers dont work in the spreadsheet (i get 24.73 after 10 years)
Hi man, thanks for this video.
Some questions:
1. Why the analysis is for 10 years if the PE and GR are for the next 5 years? is there an idea behind it?
2. Why the Min Rate of Return is 15%? is it constant that works for every company?
Great video, thank you. Any chance you could upload your excel template? Thanks.
Thanks for watching. I've just added a link to the spreadsheet in the video description
The man! Thank you.
djpaulhannon no worries. Hopefully it works ok. If not, let me know
@@InvestingwithTom Hey mate - i just tried this with Amazon, just outta curiosity and when I put in the growth (86%) everything went a little awol and just got ##### signs everywhere. Why would that be, do you know?
Thanks
djpaulhannon haha yeah. I think the numbers probably got so big you can’t see them. Just make the columns a bit wider and you’ll see the figures. Keep in mind that’s an average growth rate of the next 10 years, so 80+% a year for a decade just won’t happen
Very helpful 👍 exactly what I have been looking for
Mate, great video. Easy enough to follow.Cheers.
henry michal thanks Henry, appreciate it! Glad I could help
Where can we find the P/E Ratio 5-Year High and the P/E Ratio 5-Year Low now? (because the part of the analysis of msn monay has changed)
Just wondering, is this Net Present Value calculation or it's a different thing?
It's basically DCF model
@@luisdperdomo6377 ITS A DISCOUNTING MODEL....
@@Akshay_3099 not discounted cash flow though. This is whole sheet works to calculate the net present value of the stock (after margin of safety, assuming the minimum return). None of these values are cash flows, just earnings per share and stock price.
Great video. I am not sure if I caught this or not, but why do you use a 10-year time horizon when you use a 5-year estimated growth rate? Is that a mismatch or is there a reason it should not be a concern?
2:12
$870B market cap?
They grow up so fast 🥺
Great video, can you explain why you multiplied Eps of 10th year with PE ratio ??
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very impressed !! thanks for the education
so at the time of making this video, apple was overvalied?
under the caveat that you want a 15% then I think so. If you are comfortable with a lower minimum return it might've been fairly valued or even cheap. Apple also has around $20 or so in cash per share you'd effectively own too, which you could add back in. Thanks for watching :)
Great video thanks. What happens when the EPS is negative?
Is it just me, or by applying this method on today's share prices, a lot of companies just look massively overpriced? (without applying the "Margin of Safety").
There are some that are still undervalued, just harder to find now.
Yes, it looks that way. Some people say it's a serious bubble and I'm inclined to agree.
Well his calculations doesn't take into account inflation ($510 in 10 years is not the same today).
@@weouthere6902 it's inside the discounting ...
great video!!! Does this modelling technique have a name?
Just watching this and checking the current Apple share price.😂😂😂
Means Apple is overpriced, mate. Get out soon.
Nwoke Ideato no
Same here. I laughed my ass off waking up my neighbors. The dude thinks nr 1 company in the world is gonna tank 83%, survive it like no big deal and skyrocket. Talk about a realistic buy price.
Nwoke Ideato stock split, it’s going up again. Trust me!
Psst.... I was kindly asking weak hands to sell... 😂
Tom, one critique of Phil Town method is that the terminal P/E multiple is implying a terminal growth rate that is too high. That is if the year 10 earnings are $20 and the P/E is 20 then the year 10 value of the company is $400? If you take the gordon growth model P = Div / (R-g) and replace the Dividend for EPS * payout ratio, run it for all payout ratios from 10% to 100% and calculate the implied terminal growth for the P/E that you use in the terminal value, you will discover that the terminal growth for all payout ratios runs from the R = 15% down to around 8% (depending on the company) - I ran it over 46 real companies and their numbers as per the example that you used. The formula is: g = R - Q : (P/E) Q for payout ratio) and if you use P/E to be 2xg as prescribed by Phil Town then the formula becomes quadratic and there's no growth (g) that solves the equation for 15% required return and all payout ratios from 10%-100%. whereas payout ratio of 0 implies growth zero. Hence the P/E that should be used is for a zero growth company ie, very low.
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