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I see a lot of beginner investors asking, “How do you know if a stock is cheap?” so I figured I’d walk through how I actually do it.
Not in some complicated finance-textbook DCF way, but instead in a practical way you can use to value stocks before getting too deep into a model with too many inputs.
As Warren Buffett says, “It’s better to be approximately right than precisely wrong.”
To use Apple as an example, I first look at the current revenue on a TTM basis. This is the company’s revenue over the last four quarters. You can simply find this number online or take the sum of the last four quarters of reported revenue.
So for Apple, the current TTM revenue is **$435.617 billion**. Apple also had **14.681 billion shares outstanding** as of January 16, 2026.
Then the real research begins. This is where you look at all the different factors that can impact future revenue growth. Warren Buffett lists the following:
* management team
* market
* product
* company health
* competition
* financial health
From there, this gives you an idea of how much you expect the company’s revenue growth to be. Looking at past growth and analyst estimates can also be helpful, but only after you come up with your own number so that your estimate is not anchored to what others are saying.
For Apple, I think a reasonable long-term revenue growth estimate is **7% per year**.
Here’s how I get there. Apple is a massive company, so it is unrealistic to assume it can grow at a very high rate forever. At the same time, it still has a strong ecosystem, recurring revenue from Services, a huge installed base, and room for continued monetization. Analyst estimates currently point to strong near-term growth, but I would not assume that continues for a full five years. So instead of using an aggressive number, I bring that down to something more reasonable and sustainable.
Typically, for projections, I use the next five years. You can also do three years or a longer time frame. Five years is often used because it is close enough to today that your assumptions still have some chance of being right. If you try to project 20 years out, your estimate is much more likely to be wrong because so much can happen over that period.
So for Apple, starting with **$435.617 billion** in TTM revenue and assuming **7% annual growth**, the projected revenue would look like this:
* **Year 1:** $435.617B × 1.07 = **$466.110B**
* **Year 2:** $435.617B × 1.07² = **$498.738B**
* **Year 3:** $435.617B × 1.07³ = **$533.650B**
* **Year 4:** $435.617B × 1.07⁴ = **$571.006B**
* **Year 5:** $435.617B × 1.07⁵ = **$610.976B**
So in year 5, the expected revenue would be around **$610.976 billion**.
But the next question is: how do you know at what price the stock would sell at that time?
This is where multiples can be very helpful. I like using the **price-to-sales ratio** because it does not rely on profit, which can swing around for many reasons, and sales tend to be more stable.
The key is that the multiple should not just be based on what Apple trades at today. It should be based on what similar high-quality companies in a similar industry, with similar expected growth, trade at.
For a company like Apple, if I am only assuming **7% revenue growth**, I would not use its current price-to-sales ratio of around **9.3x** as the terminal multiple. That is too aggressive for a five-year exit assumption. Instead, I would use a more conservative but still reasonable terminal multiple of **6x sales**, based on the kind of multiple mature, high-quality technology companies with moderate growth often trade at.
So now we take the projected year 5 revenue and multiply it by the terminal price-to-sales ratio:
**$610.976B × 6 = $3.666 trillion**
That gives us the estimated future market cap.
To keep things simple, let’s assume the share count stays the same. Although in actuality, shares may increase as the company issues more shares or decrease as it is the case with Apple because of share buybacks that the company performs.
Then we divide by the number of shares outstanding to get the future per-share value:
**$3.666T ÷ 14.681B = $249.70 per share**
So now you know that if your assumptions are correct, a share of Apple bought today should be worth about **$249.70** in five years.
Now you can calculate what your investment return would be if you bought at today’s price and sold at that expected future price.
But before deciding whether the stock is attractive, you need to discount that future value back to today.
This is known as the **present value**, or the **intrinsic value**, of the stock.
To calculate this, you take the future share price and discount it back to today using your required rate of return. Let’s say you want a **10% annual return**.
This is a preference, but it’s usually based on the average market return, which is around **7% plus a premium based on the risk**. Companies with higher levels of risk you should only invest if you get a higher premium, and those with lower risk usually have less of a premium.
So the math would be:
**Present value = $249.70 ÷ (1.10)\^5 = $155.04 per share**
Now you are almost done. Some investors also use a **margin of safety**, typically around **30%**, to protect themselves in case their assumptions are wrong.
So if the present value is **$155.04**, then applying a 30% margin of safety gives:
**$155.04 × (1 - 0.30) = $108.53 per share**
So in this case, based on these assumptions, you should only buy Apple stock if it is trading at or below **$108.53 per share**.
That does not mean Apple is a bad business. It just means that with these assumptions, the stock would not look attractive unless it were much cheaper.
If you change the assumptions, the valuation changes too. That is why valuation is less about being perfectly precise and more about making reasonable assumptions and understanding how sensitive the result is to those assumptions.
This is also why one analyst can have a price target that looks very different from another’s. Most of the difference usually comes from the assumptions, especially revenue growth, the terminal multiple, and the discount rate.
That is the most important part of valuation: **the assumptions**. So make sure you think through those carefully.
Once you get good at this, you can do these calculations roughly in your head or on a simple piece of paper and quickly decide whether a stock is even worth a closer look.
The issue, of course, is that if you do this stock by stock, it can take a very long time to finally find one that looks undervalued.
That is where automation can help. You can build a model or use a tool that lets you quickly change the ticker and assumptions so you can identify these types of opportunities much faster.
I personally use a simple spreadsheet where I can change the ticker and assumptions and the data updates automatically.
You can grab the model here for free: [https://drive.google.com/drive/folders/1sZ4akJw4u6PncSKsce23mDwld3uGnSX6?usp=sharing](https://drive.google.com/drive/folders/1sZ4akJw4u6PncSKsce23mDwld3uGnSX6?usp=sharing)
If you use Wisesheets the formulas baked in allow you to keep the data live and update it when you want to. If you don't, you can still copy/paste the data from any financial site and see the calculation results.
It is very simple for demonstration purposes, but that is the point. You can always make it more advanced later. Even a basic model like this is a great way to play around with different assumptions and see how much they change the valuation.
I hope this valuation example helps newer investors get started. I wish I had learned it this way earlier, because at first I spent too much time getting distracted by overly complicated models and concepts instead of learning simple frameworks that are actually useful.