How to Know if a Stock is Cheap or Expensive? Part 2 of 2

Adam Khoo

AI-assisted summary of How to Know if a Stock is Cheap or Expensive? Part 2 of 2 — original source. Check the original for full context.

Source published: 2026-08-21

Key ideas

The 20-year Discounted Free Cash Flow (DCF) model serves as the primary valuation benchmark for roughly 90% of predictable cash-generating businesses, though temporary capital expenditure spikes—such as big tech's heavy AI investments—should be normalized using a trailing 5-year average. (4:37)
Applying cash flow discounting models to cyclical companies like Micron creates severe distortions and absurd valuations due to peak-cycle growth assumptions; cyclical firms must instead be evaluated using normalized historical multiples such as mean P/E or P/S. (14:36)
Because customer float, lending activities, and operational deposits distort operating cash flows in financial institutions, non-bank financials like UnitedHealth require a Discounted Net Income (DNI) framework, while commercial banks rely on historical Price-to-Book multiples. (19:55)
A genuine fundamental margin of safety must be verified by technical analysis before entering a trade; waiting for share prices to hit established support zones prevents investors from catching falling knives in temporarily cheap stocks. (22:31)

Detailed notes

## Background Published on YouTube by professional investor and educator Adam Khoo on August 21, 2026, this video serves as part two of a guide on evaluating stock prices. According to the description, Khoo outlines a practical framework for calculating intrinsic value, buying with a margin of safety, and avoiding the common mistake of confusing nominal share price with actual business value.

## TL;DR Khoo demonstrates that intrinsic value is an evolving range based on cash flow predictability rather than a single fixed number. He details eight core valuation models, spotlighting the 20-year Discounted Free Cash Flow (DCF) framework for steady businesses like Mastercard, while warning that cyclical companies like Micron and financial firms like UnitedHealth require specialized alternatives such as multiples or Discounted Net Income. Ultimately, he stresses that securing an undervalued business creates a margin of safety, but optimal entry timing requires pairing fundamental valuation with technical support levels.

## Atmosphere & style The presentation carries the brisk, authoritative, and pragmatic cadence of an interactive masterclass. Khoo moves smoothly between financial formulas and analytical software dashboards, punctuating the instructional breakdown with dry humor when pointing out absurd mathematical distortions in cyclical stocks. Watching the session feels practical and demystifying, equipping retail investors with institutional-style rigor while warning them against algorithmic blind spots.

## Bulletin - [04:37](https://www.youtube.com/watch?v=3DcW4KanvTM&t=277s) The 20-year Discounted Free Cash Flow (DCF) model serves as the primary valuation benchmark for roughly 90% of predictable cash-generating businesses, though temporary capital expenditure spikes—such as big tech's heavy AI investments—should be normalized using a trailing 5-year average. - [14:36](https://www.youtube.com/watch?v=3DcW4KanvTM&t=876s) Applying cash flow discounting models to cyclical companies like Micron creates severe distortions and absurd valuations due to peak-cycle growth assumptions; cyclical firms must instead be evaluated using normalized historical multiples such as mean P/E or P/S. - [19:55](https://www.youtube.com/watch?v=3DcW4KanvTM&t=1195s) Because customer float, lending activities, and operational deposits distort operating cash flows in financial institutions, non-bank financials like UnitedHealth require a Discounted Net Income (DNI) framework, while commercial banks rely on historical Price-to-Book multiples. - [22:31](https://www.youtube.com/watch?v=3DcW4KanvTM&t=1351s) A genuine fundamental margin of safety must be verified by technical analysis before entering a trade; waiting for share prices to hit established support zones prevents investors from catching falling knives in temporarily cheap stocks.

## Key takeaways - [00:00](https://www.youtube.com/watch?v=3DcW4KanvTM&t=0s) A stock represents fractional business ownership, and its intrinsic value equals all projected future cash flows discounted back to the present day divided by outstanding shares. - [02:24](https://www.youtube.com/watch?v=3DcW4KanvTM&t=144s) Intrinsic value should never be treated as an exact pinpoint figure, but rather as an evolving range consisting of base, optimistic, and conservative pessimistic scenarios. - [02:24](https://www.youtube.com/watch?v=3DcW4KanvTM&t=144s) Businesses with consistent historical earnings yield tight, dependable valuation ranges, whereas unpredictable companies produce wide, volatile fair-value spreads. - [04:37](https://www.youtube.com/watch?v=3DcW4KanvTM&t=277s) The 20-year Discounted Free Cash Flow (DCF) model is the standard workhorse for common equities, provided the company has demonstrated a consistent record of growing free cash flow. - [06:27](https://www.youtube.com/watch?v=3DcW4KanvTM&t=387s) Temporary surges in capital expenditures, such as infrastructure buildouts for AI data centers, can be smoothed using a 5-year normalized average to avoid understating underlying free cash flow. - [10:53](https://www.youtube.com/watch?v=3DcW4KanvTM&t=653s) Consensus growth estimates often require conservative algorithmic or manual haircuts across intermediate forecast years to stress-test valuations against analyst over-optimism. - [14:36](https://www.youtube.com/watch?v=3DcW4KanvTM&t=876s) Blindly plugging peak-cycle growth projections into DCF models for cyclical companies produces nonsensical intrinsic values, such as Micron modeling out to $317,000 per share. - [14:36](https://www.youtube.com/watch?v=3DcW4KanvTM&t=876s) Cyclical businesses are better analyzed using historical mean valuation multiples, though their broad uncertainty ranges often make them better candidates for short-term swing trading than long-term holding. - [19:55](https://www.youtube.com/watch?v=3DcW4KanvTM&t=1195s) Insurance and non-bank financial firms must be valued using Discounted Net Income (DNI) rather than DCF, because balance sheet float and operational reserves obscure operating cash flow. - [19:55](https://www.youtube.com/watch?v=3DcW4KanvTM&t=1195s) Commercial banking institutions require a 5-year mean price-to-book (P/B) ratio multiplied by current book value per share rather than earnings or cash flow discounting models. - [19:55](https://www.youtube.com/watch?v=3DcW4KanvTM&t=1195s) An optimal margin of safety is established when a high-quality company's market price trades below even the most conservative lower boundary of its calculated valuation range. - [22:31](https://www.youtube.com/watch?v=3DcW4KanvTM&t=1351s) Fundamental valuation alone is incomplete without technical timing; combining a strong margin of safety with price confirmation at key technical support levels optimizes entry points.

## Detailed walkthrough ### [00:00](https://www.youtube.com/watch?v=3DcW4KanvTM&t=0s) Introduction and Recap: What Is Intrinsic Value?

The primary objective of stock valuation is to establish whether a company is currently underpriced or overpriced relative to its fundamental business performance, giving investors the confidence to buy low and only sell when a stock becomes excessively overvalued. Buying fundamentally sound companies below what they are worth creates a vital "margin of safety," whereas selling at premium levels above business value secures optimal gains.

```mermaid flowchart LR accTitle: Cash Flow to Intrinsic Value Flowchart accDescr: Shows the progression from a business generating future cash flows to discounting them to present value and dividing by share count to get intrinsic value per share. subgraph Engine["Business Engine"] A["Operating Business"] --> B["Future Cash Flows / Profits"] end subgraph Valuation["Discounting & Share Price"] B --> C["Discount to Present Value (Time Value of Money)"] C --> D["Total Enterprise Value"] D --> E["Divide by Share Count = Intrinsic Value Per Share"] end ```

Every share of stock represents fractional ownership of an operating business. Because a business functions fundamentally as a "money-making machine," its value is directly proportional to its ability to generate profits and cash flow over time: - The intrinsic value of any business equals the sum total of all future cash flows discounted back to the present day due to the time value of money. - Dividing this discounted figure by the total number of outstanding shares yields the intrinsic value per share. - Because future cash flows cannot be known with absolute certainty, all valuation calculations rely on forward estimates and growth projections rather than guaranteed figures.

---

[02:24](https://www.youtube.com/watch?v=3DcW4KanvTM&t=144s) The Four Keys: Predictability and Valuation Ranges

Valuing equities requires recognizing that not all companies offer the same degree of predictability. Companies with clean histories of steady earnings yield dependable intrinsic value calculations, whereas companies with erratic track records produce volatile, unreliable estimates.

```mermaid flowchart TD accTitle: Predictability and Valuation Range Comparison accDescr: Contrasts consistent companies with narrow valuation ranges against inconsistent companies with wide ranges. subgraph Consistent["Predictable Businesses (e.g., Mastercard)"] A1["Smooth Historical Profits & Cash Flow"] --> B1["Reliable Future Growth Assumptions"] B1 --> C1["Narrow Intrinsic Value Range"] end subgraph Inconsistent["Unpredictable Businesses (e.g., SpaceX)"] A2["Erratic Historical Results (Up & Down)"] --> B2["Highly Uncertain Future Estimates"] B2 --> C2["Wide Intrinsic Value Range"] end ```

Valuation should never be viewed as an exact pinpoint number, but rather as an evolving spectrum: - **Base Case:** The baseline expectation derived from consensus growth forecasts. - **Optimistic (Bull) Case:** Built on higher growth expectations. - **Pessimistic (Bear) Case:** Anchored in conservative, slower growth rates. - **Margin of Safety Target:** Entering below the base case—or ideally below the pessimistic bear case—ensures downside protection against operational missteps. - **Range Differences:** Highly erratic businesses (such as SpaceX) carry massive fair-value spreads, potentially ranging from $50 on the pessimistic side up to $160 or $200 on the optimistic side. Conversely, predictable businesses like Mastercard exhibit very narrow, tight valuation ranges.

---

[04:37](https://www.youtube.com/watch?v=3DcW4KanvTM&t=277s) The 8 Core Valuation Models and the 20-Year DCF Approach

While numerous models exist across Wall Street, eight primary valuation techniques form the practical foundation for evaluating common stocks: 1. Mean Price-to-Earnings (P/E) Ratio 2. PEG Ratio (Price/Earnings to Growth) 3. Mean Price-to-Book (P/B) Ratio 4. Mean Price-to-Sales (P/S) Ratio 5. Price-to-Sales Growth (PSG) Ratio 6. Discounted Free Cash Flow (DCF) Method 7. Discounted Cash from Operations Method 8. Discounted Net Income Method

Among these eight frameworks, the discounted free cash flow (DCF) model is the definitive workhorse, utilized roughly "90% of the time." The core setup assumes the business operates and produces cash flow for a defined 20-year horizon before expiring; any operational cash generation beyond that 20-year window is treated as an unmodeled bonus. Future annual free cash flows across these two decades are calculated and discounted back to present value using a suitable discount rate. However, the fundamental prerequisite for using this method is a demonstrated track record of consistently growing free cash flow.

---

[06:27](https://www.youtube.com/watch?v=3DcW4KanvTM&t=387s) Practical Application: Valuing Mastercard and Normalizing CapEx

Evaluating Mastercard (ticker symbol MA) illustrates how the 20-year DCF framework operates in practice using analytical platforms such as Stock Oracle. Mastercard carries a 5-year projected growth rate of 15.65% and a long-term growth projection of 17%. These growth inputs originate from FactSet, aggregating consensus estimates from hundreds of equity analysts. While investors can use these institutional figures directly, conservative practitioners often haircut them significantly (for example, slashing a 15% projection in half to 7.5%) to run stringent personal stress tests.

A visual examination of Mastercard's financials confirms sustained, year-over-year gains in free cash flow, meeting the DCF model's strict consistency requirements:

$$\text{Free Cash Flow (FCF)} = \text{Operating Cash Flow} - \text{Capital Expenditures (CapEx)}$$

- **The CapEx Distortion Problem:** Tech giants such as Amazon, Meta, and Microsoft routinely produce reliable operating cash flows, but their recent massive capital expenditure cycles (such as building AI data centers) have temporarily depressed reported free cash flow. - **Normalizing CapEx:** A temporary spike in capital spending does not invalidate the DCF method. When operating cash flow remains strong, capital expenditure can be "normalized" by taking a trailing 5-year average to smooth out cyclical capital spending spikes. - **Mastercard Valuation Outcome:** Running the 20-year discounted free cash flow model on Mastercard's consistent financial profile yields an intrinsic value of approximately $719 per share.

[10:53](https://www.youtube.com/watch?v=3DcW4KanvTM&t=653s) Mastercard and the Oracle Value AI Adjustment

To understand how the valuation engine functions under the hood, Khoo navigates through the platform's intrinsic value calculation section, selecting the discounted free cash flow (DCF) method for Mastercard. The automated breakdown calculates an intrinsic value of $719 per share. This baseline model relies on consensus FactSet growth projections: business cash flows expanding at 15% annually for the first five years, accelerating slightly to 17% from year 6 to year 10, and tapering to a 4% terminal growth rate for the final decade.

```mermaid flowchart TD accTitle: Intrinsic Value Workflow by Business Type accDescr: Decision logic showing how business predictability dictates the appropriate valuation method.

Start["Analyze Business Model & Cash Flows"] --> Choice{"Cash Flow Profile"}

subgraph Predictable["Predictable & Compounding"] Choice -->|"Steady Cash Generation"| FCF["Discounted Free Cash Flow (DCF) e.g., Mastercard ($719 vs $561 Oracle)"] end

subgraph Cyclical["Cyclical / Commodity"] Choice -->|"Volatile Boom-and-Bust"| Mult["Historical Multiples • Mean 5-Yr P/E without NRI • Mean P/S Growth e.g., Micron ($556 - $1,016)"] end

subgraph Financials["Financial Institutions"] Choice -->|"Insurance / Asset Mgmt / Credit"| DNI["Discounted Net Income (DNI) e.g., UnitedHealth ($529 vs $446)"] Choice -->|"Commercial Banks"| PB["Mean Price-to-Book (5-Yr Avg P/B)"] end ```

Khoo addresses a frequent point of confusion for users of Stock Oracle: why does the platform's proprietary "Oracle Value" report $561 when the raw DCF equation outputs $719? He explains that while the algorithm automatically selects discounted free cash flow as the optimal methodology for a cash generator like Mastercard, it applies an algorithmic conservatism filter. The AI evaluates FactSet's forward consensus, and whenever it detects excessive optimism, it cuts the forward growth rates downward. In Mastercard's case, the AI dampens the growth forecast for years 6 through 10 down to roughly 9.5%, which recalculates the valuation down to approximately $559 or $560.

Investors are not bound to algorithmic conclusions; the model allows users to adjust inputs to reflect their own convictions. If an investor considers the AI overly pessimistic and projects a 12% intermediate growth rate, plugging that figure in outputs an intrinsic value of $607 per share. As Khoo reiterates, intrinsic value is never a fixed, absolute number—it is always a derivative of forward-looking projections. Investors can stress-test a business across optimistic best-case scenarios, conservative worst-case scenarios, and a middle base case.

- **Mastercard Free Cash Flow Model Inputs:** 15% growth for years 1–5, 17% growth for years 6–10, and a 4% terminal growth rate yield an unadjusted intrinsic value of $719. - **Oracle Value Conservative Adjustment:** Trims intermediate growth estimates from 17% to roughly 9.5%, pulling the valuation down to $561. - **Custom User Scenario:** Modeling an intermediate 12% growth rate yields a fair value of $607.

---

[14:36](https://www.youtube.com/watch?v=3DcW4KanvTM&t=876s) The Trap of Cyclical Stocks: Valuing Micron (MU)

Valuation approaches must pivot dramatically when analyzing cyclical companies such as semiconductor memory manufacturer Micron Technology (ticker: MU). Khoo demonstrates why relying blindly on the discounted free cash flow method—his personal favorite—fails when applied to cyclical businesses. Examining Micron's historical financial charts reveals severe volatility: operating cash flow swings violently up and down across cycles, while free cash flow alternates erratically between positive surges, deep negative plunges, and flat stretches.

Because free cash flow lacks historical stability, predicting what Micron will generate over a 5-, 10-, or 15-year horizon is fundamentally impossible. Optimists assume current cyclical peaks will continue indefinitely, while pessimists anticipate an inevitable downcycle once supply catches up. Khoo snorts in disbelief while demonstrating what happens if an investor blindly feeds consensus analyst estimates into a DCF model for Micron: because FactSet projections assume 99% annual growth over the next five years and 148% long-term growth, the DCF calculator outputs an absurd intrinsic value of $317,000 per share.

To evaluate cyclical businesses sensibly, investors must discard cash flow discounting and apply normalized valuation multiples, such as the mean price-to-earnings (P/E) or mean price-to-sales (P/S) ratios:

This dynamic creates a wide valuation range spanning $500 to $1,000. If Micron is worth $1,000, it is deeply undervalued at current market prices; if it is worth $500, it is heavily overvalued. Because of this massive uncertainty, Khoo personally avoids owning cyclical stocks as long-term investments, preferring instead to trade their price swings via short-term options strategies where long-range fundamental valuation is secondary.

---

[19:55](https://www.youtube.com/watch?v=3DcW4KanvTM&t=1195s) Valuing Financials and Insurance: UnitedHealth Group (UNH)

Valuation techniques must also adjust for financial entities, including insurance providers, asset managers, credit card issuers, and banking institutions. Discounted free cash flow models fail for financial firms because the movement of customer float, lending balances, and operational deposits distorts reported operational cash flows. While banks must be evaluated using a 5-year mean price-to-book (P/B) ratio multiplied by current book value per share, non-bank financials such as American Express or managed care conglomerates require a discounted net income (DNI) model.

To illustrate, Khoo examines healthcare and insurance giant UnitedHealth Group (ticker: UNH). FactSet consensus models UNH growing at 15.96% annually over the next five years, followed by 13.67% long-term growth. Projecting net profits over a 20-year horizon and discounting those flows back to present value produces a baseline intrinsic value of $529 per share under the discounted net income method.

By contrast, the conservative AI-driven Oracle Value assigns UnitedHealth a valuation of $446 by shaving percentage points off FactSet's forward growth trajectory. However, Khoo highlights that in real-world investing, arguing over whether UNH is worth $446 or $529 is largely irrelevant because the stock trades around $384 at the time of analysis. When a high-quality company trades at a clear discount to even the most conservative boundary of its valuation range, it offers an undeniable margin of safety.

- **Methodology Rule of Thumb:** Use discounted net income for asset managers, insurance companies, and select consumer finance firms; use mean price-to-book for commercial banks. - **UnitedHealth Growth Estimates:** 15.96% for the initial 5-year period; 13.67% long-term normalized growth. - **UnitedHealth Valuation Comparison:** Discounted Net Income yields $529, Oracle Value yields $446, and current market price sits comfortably below both at $384.

[22:31](https://www.youtube.com/watch?v=3DcW4KanvTM&t=1351s) Combining Margin of Safety with Technical Analysis

When a share price trades significantly below multiple valuation models and falls beneath the calculated valuation range, it creates a true margin of safety. This represents the ideal window to purchase shares, provided that the underlying business is fundamentally sound. Valuation metrics alone are insufficient; you must first verify that you are dealing with a high-quality company before even considering the price tag.

However, fundamental analysis and intrinsic value calculations represent only part of the equation. Technical analysis and chart patterns play an equally critical role before executing any entry. Rather than buying blindly as a stock collapses—where an ostensibly "cheap" stock can easily become much cheaper in the short run—it is crucial to wait until the price waves down to a clear, strong support level with a demonstrated probability of rebounding. Merging solid fundamentals with precise technical timing is the specific combination that allows an investor to beat the broader market consistently.

```mermaid flowchart LR accTitle: Combined Investment Decision Framework accDescr: Flowchart illustrating Adam Khoo's process of evaluating quality, valuation, and technical timing before entering a stock. subgraph Quality["1. Business Assessment"] Q["High-Quality Company Check"] end subgraph Valuation["2. Intrinsic Value & Safety"] V["Valuation Range Analysis"] --> M["Margin of Safety Established"] end subgraph Timing["3. Technical Execution"] T["Wave Down to Strong Support"] --> E["Optimal Entry Point"] end Q --> V M --> T ```

- **Fundamental Prerequisite**: A low valuation only matters if the underlying business has durable competitive advantages and strong economics. - **Multiple Valuation Confirmation**: Confidence increases when the market price sits below the outputs of several distinct valuation models. - **Support-Level Confirmation**: Technical analysis prevents catching falling knives by requiring price stabilization at verified support zones before capital is deployed.

[23:23](https://www.youtube.com/watch?v=3DcW4KanvTM&t=1403s) Mastering Valuation and Resources for Investors

While tools like Stock Oracle streamline the process of screening and identifying stocks that are sufficiently cheap to buy, mastering every underlying valuation methodology requires comprehensive study. Deep dives into these quantitative and qualitative methods are explored across multi-hour training programs, such as the Whale Investor course and the Wealth Academy Investor Masterclass. There are currently numerous compelling opportunities in the market where great, high-caliber businesses are trading at deeply discounted levels.

Investors looking to sharpen their skills across investing and trading can explore specialized courses through Piranha Profits to learn how to generate consistent income across global financial markets, or attend live online training via the Wealth Academy Global live seminars. As Adam Khoo frequently reminds his community before signing off: "May the markets be with you."

- **Resources & Platforms**: - Educational courses and tools available at PiranhaProfits.com (including trading and value momentum systems). - Interactive live seminars hosted via WealthAcademyGlobal.com. - Software screening and intrinsic value estimation powered by tools like Stock Oracle.

## Notable quotes > [00:00](https://www.youtube.com/watch?v=3DcW4KanvTM&t=0s) The intrinsic value of any business equals the sum total of all future cash flows discounted back to the present day due to the time value of money. — Adam Khoo

> [00:00](https://www.youtube.com/watch?v=3DcW4KanvTM&t=0s) Because future cash flows cannot be known with absolute certainty, all valuation calculations rely on forward estimates and growth projections rather than guaranteed figures. — Adam Khoo

> [02:24](https://www.youtube.com/watch?v=3DcW4KanvTM&t=144s) Valuation should never be viewed as an exact pinpoint number, but rather as an evolving spectrum — Adam Khoo

> [04:37](https://www.youtube.com/watch?v=3DcW4KanvTM&t=277s) Among these eight frameworks, the discounted free cash flow (DCF) model is the definitive workhorse, utilized roughly "90% of the time." — Adam Khoo

> [06:27](https://www.youtube.com/watch?v=3DcW4KanvTM&t=387s) A temporary spike in capital spending does not invalidate the DCF method. When operating cash flow remains strong, capital expenditure can be "normalized" by taking a trailing 5-year average to smooth out cyclical capital spending spikes. — Adam Khoo

> [10:53](https://www.youtube.com/watch?v=3DcW4KanvTM&t=653s) As Khoo reiterates, intrinsic value is never a fixed, absolute number—it is always a derivative of forward-looking projections. — Adam Khoo

> [14:36](https://www.youtube.com/watch?v=3DcW4KanvTM&t=876s) Because free cash flow lacks historical stability, predicting what Micron will generate over a 5-, 10-, or 15-year horizon is fundamentally impossible. — Adam Khoo

> [19:55](https://www.youtube.com/watch?v=3DcW4KanvTM&t=1195s) When a high-quality company trades at a clear discount to even the most conservative boundary of its valuation range, it offers an undeniable margin of safety. — Adam Khoo

> [22:31](https://www.youtube.com/watch?v=3DcW4KanvTM&t=1351s) Rather than buying blindly as a stock collapses—where an ostensibly "cheap" stock can easily become much cheaper in the short run—it is crucial to wait until the price waves down to a clear, strong support level with a demonstrated probability of rebounding. — Adam Khoo

> [23:23](https://www.youtube.com/watch?v=3DcW4KanvTM&t=1403s) May the markets be with you. — Adam Khoo

## Mentioned Adam Khoo, Mastercard, SpaceX, Amazon, Meta, Microsoft, Micron Technology, UnitedHealth Group, American Express, Stock Oracle, FactSet, Piranha Profits, Wealth Academy, Whale Investor, Wealth Academy Investor Masterclass

## Video description Part 2 of 2. Watch Part 1 first!

Is a $20 stock actually cheap? Is a $2,000 stock expensive? The single biggest mistake investors make is confusing share price with actual business value.

A great company can turn into a terrible investment if you overpay, while a high-dollar stock can be an absolute steal if it trades below its fair value.

In this video, I break down the exact framework I use for determining the intrinsic value of a stock, buying with a margin of safety, and protecting your portfolio from valuation traps.

What You Will Learn: 1) Price vs. Value: Why nominal share prices mean nothing without business context. 2) Quality Over Cheapness: Why buying a great business at a fair price beats buying a bad business at a discount. 3) Valuation is a Range: How to handle cash flow uncertainty and why you shouldn't try to value every stock on the market. 4) Margin of Safety: How to build a buffer for error before making any investment.

======================== Stock Investing & Trading insights by Adam Khoo will show you profitable trading and investment opportunities in today's stock markets.

These are essential strategies for stock traders and investors who want to improve their investment and trading performance.

Adam Khoo is a professional stock investor and options trader and the best-selling author of 16 books including 'Winning the Game of Stocks" and "Profit from the Panic". Thousands of students have profited from his sharp investment insights into the world of stock market investing and trading. ===================== Sign up for our courses/mentorship programs 📗 Value Momentum Investing: http://bit.ly/4mqrEVP 📙 Options Waverider™: http://bit.ly/4c5xyrR 📘 Price Action Manipulation™ (Trading): http://bit.ly/48FUAmQ 📕 Income Investing™ (Dividends): http://bit.ly/3Ow8CRj

Grab our Playbook Subscriptions Ultimate Investors Playbook™: http://bit.ly/3QiN6zT Options Tactics Playbook™: http://bit.ly/4tCQFPL PAM™ Trader Playbook: http://bit.ly/4mmYnv0 ===================== 💻 Join Our Wealth Academy Live Seminars https://www.wealthacademyglobal.com ===================== 🧑‍🏫 Visit Adam Khoo Learning Technologies Group https://www.akltg.com ===================== Follow Me On Social Media 🌟 Facebook: https://facebook.com/adamkhoosuccess 🌟 Instagram: https://www.instagram.com/adamkhoosuccess/ ===================== Follow Piranha Profits On Social Media 🐟 Facebook: https://www.facebook.com/piranhaprofits 🐟 Instagram: https://www.instagram.com/piranhaprofits 🐟 Telegram: https://t.me/piranhaprofits 🐟 Discord: https://discord.gg/piranhaprofits ===================== 👉 If you've found this video helpful, please LIKE, SHARE, & COMMENT 👉 SUBSCRIBE to my Channel for more Market Analyses & Investing Strategies 👉 Click on the NOTIFICATION BELL to get notified whenever I upload a new video ===================== 💸 MAY THE MARKETS BE WITH YOU! 💸

[Source](https://www.youtube.com/watch?v=3DcW4KanvTM)

中文简报

如何判断股票是便宜还是昂贵？（下篇） Khoo指出，内在价值是基于现金流可预测性而动态变化的区间，而非单一固定数字。他详细阐述了八种核心估值模型，重点介绍了适用于Mastercard等稳健企业的20年期自由现金流折现（DCF）框架，同时提醒投资者，Micron等周期性公司以及UnitedHealth等金融类企业需要采用乘数法或净利润折现等专用替代方法。最后，他强调，买入被低估的企业可以构筑安全边际，但最佳入场时机需要将基本面估值与技术支撑位相结合。 20年期自由现金流折现（DCF）模型是约90%现金流可预测企业的核心估值基准，但对于暂时性的资本支出激增（例如大型科技公司激增的AI投资），应采用过去5年平均值进行常态化平滑处理。 (4:37) 对Micron等周期性公司应用现金流折现模型，会因周期顶部的增长假设而导致严重失真和荒谬的估值；周期性企业必须改用常态化的历史估值倍数（如平均P/E或P/S）进行评估。 (14:36) 由于客户浮存金、借贷业务和运营存款会扭曲金融机构的经营现金流，UnitedHealth等非银行金融企业需要采用净利润折现（DNI）框架，而商业银行则依赖历史市净率（P/B）倍数。 (19:55) 在建仓交易前，基本面所体现的真正安全边际必须经过技术分析的确认；等待股价触及既定支撑区间，有助于防止投资者在暂时看似便宜的股票上盲目“接飞刀”。 (22:31)

Reading summary

Adam Khoo argues that determining whether a stock is underpriced requires matching the valuation model to a company's cash flow predictability and stress-testing estimates across a range, rather than relying on a single pinpoint figure or applying discounted cash flows universally. Valuation Ranges and Cash Flow Predictability (2:24) Intrinsic value represents the sum of all future cash flows discounted back to the present due to the time value of money, divided by the total shares outstanding. Because future cash generation cannot be known with absolute certainty, Khoo emphasizes that valuation must be treated as a dynamic range rather than an exact number, bounded by optimistic (bull), baseline, and pessimistic (bear) scenarios. The reliability of these ranges depends directly on historical predictability. Companies with smooth, consistent earnings—such as Mastercard—produce tight, dependable valuation spreads. In contrast, businesses with erratic operational records—such as SpaceX—exhibit wide fair-value bands (such as $50 on the conservative side to $160 or $200 on the optimistic side), requiring investors to demand an entry price near or below conservative assumptions to secure a genuine margin of safety. Applying Discounted Cash Flow to Predictable Compounders (6:27) Khoo identifies the 20-year discounted free cash flow (DCF) framework as his primary tool, utilized approximately 90% of the time, provided the business demonstrates consistently expanding free cash flow. For predictable cash generators undergoing cyclical capital spending spikes—such as technology companies building artificial intelligence data centers—reported free cash flow can be artificially depressed. In such instances, Khoo normalizes capital expenditures using a five-year trailing average rather than abandoning the model. Evaluating Mastercard illustrates the sensitivity of DCF calculations to forward inputs. Applying institutional FactSet consensus projections (15% annual growth for years 1–5, 17% for years 6–10, and a 4% terminal rate) yields an intrinsic value of $719 per share. However, applying conservative algorithmic dampening—such as trimming intermediate growth to 9.5%—lowers fair value to approximately $561, while an intermediate 12% growth scenario outputs $607, demonstrating why investors must stress-test consensus assumptions. Model Selection for Cyclical and Financial Businesses (14:36) Blindly applying DCF to cyclical companies produces severe distortions. Khoo highlights that projecting Micron Technology's cyclical peak consensus growth rates (99% over five years and 148% long term) into a DCF model generates an absurd valuation of approximately $317,000 per share. Cyclical businesses instead require normalized multiples, such as a five-year mean price-to-earnings ratio (yielding roughly $556) or a price-to-sales growth model (yielding roughly $1,016). Due to this wide fair-value variance, Khoo avoids holding cyclical stocks as long-term investments, preferring short-term options trading around price swings. Financial institutions also distort standard free cash flow metrics due to the movement of lending capital, customer float, and deposits. Commercial banks must be evaluated using a five-year mean price-to-book (P/B) ratio multiplied by book value per share. Conversely, non-bank financials, asset managers, and insurance providers require a discounted net income (DNI) model. Applying DNI to UnitedHealth Group produces a $529 baseline and a conservative $446 estimate, offering a clear margin of safety against its prevailing trading price of $384. Pairing Fundamental Safety with Technical Timing (22:31) A company trading beneath multiple conservative valuation models establishes an authentic margin of safety, but Khoo stresses that valuation metrics are only meaningful after confirming the underlying business has durable competitive economics and superior operational quality. An intrinsically cheap stock can continue to fall significantly in the near term if market sentiment remains negative. To avoid buying into steep market declines, Khoo asserts that fundamental intrinsic value analysis must be coupled with technical timing. Rather than attempting to catch falling shares blindly, investors should wait until market prices wave down into verified technical support levels showing a high probability of stabilizing before deploying capital. Khoo concludes that successful valuation depends on matching models to business predictability and stress-testing consensus forecasts with conservative assumptions. However, intrinsic value models remain inherently limited when applied to highly cyclical industries, forcing long-term investors to either accept wide valuation spreads or avoid holding cyclical assets outright.

Source quotes

[0:00] Adam Khoo: The intrinsic value of any business equals the sum total of all future cash flows discounted back to the present day due to the time value of money. [0:00] Adam Khoo: Because future cash flows cannot be known with absolute certainty, all valuation calculations rely on forward estimates and growth projections rather than guaranteed figures. [2:24] Adam Khoo: Valuation should never be viewed as an exact pinpoint number, but rather as an evolving spectrum [4:37] Adam Khoo: Among these eight frameworks, the discounted free cash flow (DCF) model is the definitive workhorse, utilized roughly "90% of the time." [6:27] Adam Khoo: A temporary spike in capital spending does not invalidate the DCF method. When operating cash flow remains strong, capital expenditure can be "normalized" by taking a trailing 5-year average to smooth out cyclical capital spending spikes. [10:53] Adam Khoo: As Khoo reiterates, intrinsic value is never a fixed, absolute number—it is always a derivative of forward-looking projections. [14:36] Adam Khoo: Because free cash flow lacks historical stability, predicting what Micron will generate over a 5-, 10-, or 15-year horizon is fundamentally impossible. [19:55] Adam Khoo: When a high-quality company trades at a clear discount to even the most conservative boundary of its valuation range, it offers an undeniable margin of safety. [22:31] Adam Khoo: Rather than buying blindly as a stock collapses—where an ostensibly "cheap" stock can easily become much cheaper in the short run—it is crucial to wait until the price waves down to a clear, strong support level with a demonstrated probability of rebounding. [23:23] Adam Khoo: May the markets be with you.

Original transcript

[0:00] Hi guys. So, in part two of this video, [0:02] I'll be talking about all the different [0:04] methods that I use to value a stock. So, [0:06] I if I know if a stock is undervalued or [0:09] overvalued, that helps me my buying and [0:11] selling decisions. Because when you [0:13] constantly buy when a stock is [0:14] undervalued and only sell it when it's [0:16] way overvalued, that's how you make [0:18] money. So, before we continue with part [0:21] two, make sure you've watched part one. [0:23] If you have not watched part one, pause [0:25] this video, finish part one, and come [0:27] back to this video. Now, if you're ready [0:29] for part two, let's begin. [0:41] Before I go into all the different [0:43] methods of how I value a stock, let me [0:45] just do a very quick recap of what I [0:47] covered in part one in just a minute or [0:49] so. So, the first thing to understand is [0:52] what is intrinsic value? Intrinsic value [0:55] is what the shares of a stock are worth. [0:58] fundamentally. So when we buy when the [1:00] share price is way below intrinsic [1:02] value, we are buying something less than [1:04] what it is worth, we've got a margin of [1:06] safety. And when we sell a stock and [1:09] it's way above intrinsic value, we're [1:11] getting a good deal because you're [1:12] selling it more than what it is really [1:14] worth. So again, how do you calculate [1:16] intrinsic value? Remember, when you buy [1:18] a share of stock, you're buying a piece [1:21] of a business. Always remember that. [1:23] Now, what's a business? A business is a [1:26] money-making machine. A business [1:28] generates profits and cash flow. And the [1:32] more money it makes, the more it is [1:34] worth. It's as simple as that. So [1:36] simply, what is a business worth? It is [1:39] worth all the future cash flow it can [1:42] generate. So if you take all the future [1:45] cash it can generate or future income [1:47] and you discount it to present value [1:49] because of the time value of money, that [1:51] gives you the value of the business. [1:53] divide by number of shares that gives [1:55] you the intrinsic value per share. So [1:58] you can see that the intrinsic value of [2:00] a business and a stock all hinges upon [2:03] how much profits and cash flow you think [2:06] it will generate in the future. And the [2:09] problem is that we cannot predict the [2:11] future for certain. What we can do is to [2:13] rely on estimates and growth [2:15] projections. So before we talk about [2:18] valuation, there are four keys to [2:20] understand before valuing any stock [2:22] which I covered again in in part one. [2:24] Here's a very quick recap. The first [2:26] point is that there are certain [2:27] companies where their profits and cash [2:29] flow are very consistent like this [2:31] company very consistent. So when they're [2:34] historically very consistent, then you [2:36] know that the future cash flow and [2:38] profits are also going to be fairly [2:40] consistent. So for these companies the [2:43] valuation you get will be very reliable [2:46] but there are certain companies like [2:48] this company where you can see the [2:50] profits and cash flow are very [2:52] inconsistent. They go up they go down [2:54] they go up they go down they go up go [2:56] down right so it's very very [2:58] inconsistent. So for companies like this [3:00] the future estimate or projection is [3:03] very very uncertain. I mean it could [3:05] keep going up like now it's doing so [3:08] well or it could drop back down again. [3:10] So for these kind of companies when you [3:12] use any valuation method the number that [3:15] you get the intrinsic value will not be [3:17] as reliable because it is uncertain what [3:20] the future will bring. Second point to [3:22] remember is that valuation is always a [3:24] range and not a precise number. So when [3:27] you take a look at stock oracle for [3:28] example and you look at the intrinsic [3:31] value that tells you the base case [3:33] valuation [3:35] but there's always a optimistic [3:38] valuation based on higher projected [3:40] growth rates and a more pessimistic [3:42] valuation based on more pessimistic [3:44] growth rate. It all depends on the [3:46] growth projections that we use. But as [3:48] long as we buy when the share price is [3:51] way below the base case valuation or [3:54] even better even below the bare case [3:56] valuation that gives us a margin of [3:59] safety. So remember that the more [4:01] inconsistent a company's profits and [4:04] cash flow is the wider the fair value [4:08] range. I mean it could be this it could [4:09] be that like like I said space XP space [4:12] X the profits are still very [4:14] inconsistent. So what is it worth? [4:16] What's the range of the fair value? [4:17] Well, optimistically, Space X could be [4:20] worth, let's say, $160 [4:23] or $200, but pessimistically it could be [4:26] worth $50. There's a wide range. But if [4:28] you look at Mastercard, for example, [4:30] because the profits and cash are so [4:33] consistent, the the range of the [4:35] valuation is very, very narrow. With [4:37] that out of the way, let's jump into all [4:39] my different valuation methods. Now bear [4:41] in mind that there are many ways to [4:43] value a stock but for me I tend to use [4:46] eight main methods and these are the [4:48] eight methods. Mean PE ratio, PEG ratio, [4:53] mean price to book ratio method, mean [4:55] price to sales ratio method, price to [4:57] sales growth ratio method, discounted [4:59] free cash flow method, discounted cash [5:02] from operations method and finally [5:04] discounted net income method. Now, out [5:06] of all these eight methods, which is the [5:09] most uh comprehensive, if you will, the [5:12] most uh reliable if you will, you know, [5:14] and the answer is this one. The [5:16] discounted free cash flow method is the [5:18] one I use the majority of the time. 90% [5:22] of the time, I value a stock based on [5:24] discounted free cash flow. So, this [5:27] method [5:29] is one where I project the future free [5:32] cash flow of the business for the next [5:35] 20 years. So I assume the company will [5:37] last 20 years and die. So anything more [5:40] than 20 years is a bonus. Okay. So I [5:42] project how much free cash flow it will [5:44] generate for the next 20 years and then [5:47] discount it to present value based on an [5:50] appropriate discount rate. That's called [5:52] the discounted free cash flow method. [5:54] Again I use this 90% of the time. Now [5:58] for this method to be reliable, what is [6:01] the assumption? [6:04] The assumption is that the free cash [6:06] flow has to be increasing consistently. [6:10] Ah so if the free cash flow is not [6:12] increasing consistently it is um [6:15] inconsistent then whatever number you [6:17] get will not be reliable. So that is why [6:20] most of the time I only buy companies [6:22] with very consistent increase in free [6:25] cash flow. So let me give you a few [6:27] examples. Let's take a look at one of [6:28] the stocks I've been holding for many [6:30] many years and I'll continue to hold. [6:32] It's one of my core positions. It is [6:33] Mastercard ticker symbol MA. So if you [6:37] take a look at Mastercard for example, [6:38] few things to understand is to look at [6:40] the projected growth rate. You can see [6:42] for the next 5 years it it is projected [6:45] to grow at 15.65%. [6:48] And over the longer term it's projected [6:50] to grow at 17%. Now who comes up with [6:53] all these projections? Not me. These [6:56] financial projections come from Faxet [6:58] which is my data provider of stock [7:00] oracle. So they are one of the largest [7:02] financial data companies in the world [7:04] and they get the projections from the [7:06] consensus estimates of hundreds of [7:08] analysts that study these companies. Now [7:11] does it mean that you have to use these [7:14] projections? No. You can disagree with [7:16] them. In fact sometimes when I do my own [7:18] manual valuation I may say I don't think [7:20] it's 15%. I'm going to divide it by two [7:23] and say only 7%. So it's completely up [7:26] to you to take these estimates or come [7:28] up with your own more pessimistic [7:31] estimates which I'll show you how to do [7:32] in a short while. Yeah. But bear in mind [7:34] that stock oracle its uh calculation of [7:38] its different intrinsic value methods [7:40] are based on these projections. So let's [7:43] take a look at intrinsic value over [7:45] here. If I go to intrinsic value, you [7:48] can see again these are all the [7:50] different methods of valuation which I [7:52] showed you earlier on and stock oracle [7:55] automatically values the stock based on [7:57] all these methods which I mentioned [7:59] earlier on which is the discounted free [8:02] cash flow method, the discounted cash [8:04] flow method, discounted net income, uh [8:07] mean price to sales, mean price to [8:09] earnings, mean price to book, price to [8:12] sales growth ratio, they are all there, [8:14] all pre-calculated. method for you. Now [8:17] again remember which is the method that [8:19] I use 90% of the time. [8:22] It is this method which is the [8:24] discounted free cash flow method based [8:28] on the business uh lasting for 20 years. [8:31] So if the business lasts for more than [8:33] 20 years that is a bonus and the [8:35] intrinsic value should be a lot higher. [8:38] Now remember before using this method to [8:40] value a stock what is the condition? The [8:44] condition is that the business must have [8:46] a history of consistently growing free [8:49] cash flow. If it doesn't, you cannot use [8:51] this method. So, let's double check. [8:53] Does Mastercard meet that condition. [8:56] Very simple. Scroll up, click on [8:59] financials over here. [9:02] Uh, you can look at the line chart, you [9:04] can look at a bar chart, up to you. I [9:05] prefer a bar chart and look for this [9:08] thing called free cash flow. Yes. So [9:12] this business must have a consistently [9:15] increasing free cash flow in dark green. [9:17] So is it pretty consistent? Does it go [9:20] up pretty consistently? [9:22] Yes. So you can use this method. All [9:25] right. Now do bear in mind that uh [9:28] remember that free cash flow [9:32] is equal to the cash uh operating cash [9:36] flow minus the capital expenditure. [9:39] Okay. Now there are certain companies [9:41] like for example Amazon or recently Meta [9:45] and and Microsoft their free cash flow [9:48] historically has been very consistent [9:51] because their operating cash flow is [9:52] very consistent but recently because [9:55] they spent a lot on capex building the [9:57] data centers this capex recently went up [10:00] a lot causing the free cash flow to [10:03] drop. Okay so in this situation can I [10:06] use this method? Yes, I can still use [10:09] the method because the sudden increase [10:11] in capex is temporary. Okay. So for [10:15] these kind of companies, what I do is as [10:17] long as the operating cash flow in [10:21] orange is consistent, I will use the [10:24] free cash flow method. But what I do is [10:26] I will normalize the capital [10:28] expenditure. What is normalize mean? So [10:31] instead of taking the recent capex which [10:33] is very high, I will take the average [10:35] capex for the last 5 years to smooth out [10:39] the capex. So based on this method of [10:41] projecting the free cash flow for the [10:43] next 20 years and discounting it to [10:46] present value, what is Mastercard worth? [10:49] Mastercard is worth $719. [10:53] And if you want to know the exact [10:55] calculation method, it is right here. [10:58] Let me show you. Scroll down [11:01] and there. So, intrinsic value [11:04] calculation, select uh free cash flow [11:07] method over here. [11:09] And it shows you the entire calculation [11:12] that gets to $719 [11:15] per share. So bear in mind that this [11:17] intrinsic value is based on the growth [11:20] projection [11:21] where the business grows at 15% [11:25] for the next 5 years and then [11:28] subsequently grows at 17% from year 6 to [11:31] year 10 and for the last 10 years it [11:34] grows only at 4%. Which is kind of like [11:37] a terminal value if you will. So that's [11:40] how we get uh $7 [11:44] uh $19. Now for those of you who are new [11:46] to stock oracle you may be a bit [11:48] confused and say okay so if the [11:49] intrinsic value of 7 is 719 then what is [11:53] oracle value why does oracle value show [11:56] me that it is worth 561. [11:58] So Oracle value is a proprietary [12:02] valuation method where it will select [12:05] the best method for this particular [12:07] company. So in the case of masterard the [12:10] best method to use is the discounted [12:13] free cash flow method. Okay. Okay. So it [12:15] selects the best method but then what it [12:17] does is that it would adjust the growth [12:19] rates where it thinks it is too [12:22] optimistic. It will adjust it downwards. [12:25] So in other words, how does Oracle value [12:27] get 561? Now again it's a proprietary [12:30] algorithm but my guess is that what the [12:34] algorithm does is that it uses a lower [12:36] growth rate. So instead of [12:41] uh taking uh 15% here and 17% the Oracle [12:45] AI algorithm is trained to be more [12:48] conservative. So if it feels that fact [12:50] sets data or growth projection is too [12:53] optimistic it will lower the growth [12:56] projection to something more [12:57] conservative. So in this case, my um my [13:01] guess is that the AI algorithm probably [13:04] adjusts the growth rate down to about [13:06] let's say 9.5%. And then recalculates [13:09] based on 9.5% growth for year 6 to year [13:12] 10 and it comes up with the intrinsic [13:15] value of about that about 559 or roughly [13:18] about $560. [13:21] Uh which is where we get over that. See [13:24] what I'm saying? Right? So in other [13:25] words, the oracle value is an AI [13:28] algorithm that does adjustments to be [13:31] more conservative to come out with a [13:33] figure if it doesn't agree on fact sets [13:36] uh data projections. Now some of you may [13:39] say uh but can I put in my own [13:42] projections? What if I don't agree with [13:44] the oracle value? Sure, you can put in [13:46] your own projections. That's the beauty [13:48] of this whole model. So let's say for [13:50] example you are not as pessimistic as [13:53] the Oracle value AI and you think no I [13:56] think they can grow at 10% or they can [13:59] grow at 12% for year 6 to year 10 then [14:02] you can always put in your own [14:04] projections which you're more [14:05] comfortable with right so if you put in [14:07] 12% here and calculate then you can see [14:09] that the intrinsic value based on your [14:11] projection will be $67 [14:15] see what I'm saying so I keep saying [14:17] that intrinsic value is always based on [14:20] projection. So it's up to you. Do you [14:21] want to be optimistic of a higher [14:23] projection? You want to be more [14:25] pessimistic of a lower projection. Now [14:27] sometimes you can do both and say okay [14:28] this is the best case scenario. That's [14:30] the worst case scenario. And then you [14:31] take a base case average. So there are [14:33] many ways you can use this calculator. [14:36] Now let's take a look at another very [14:38] different type of stock. One that's very [14:40] popular is micron ticker symbol MU. So [14:43] if you look at micron the question would [14:45] be how do you value the stock? Again, [14:47] which method do you use? Can we use the [14:50] discounted free free cash flow method, [14:53] which is my favorite? We cannot because [14:55] this business doesn't have a history of [14:57] consistently increasing free cash flow [15:00] or consistently increasing cash from [15:02] operations. Let's take a look. So, if we [15:05] look at the financials, click on [15:07] financials. And uh again, you can look [15:10] at the bar chart or the line chart, up [15:12] to you. So, uh take a look over here. [15:14] Look at the history of the operating [15:18] cash flow in orange. It goes up, it goes [15:21] down, it goes up, it goes down, and now [15:23] it's all the way up there. So, it is at [15:25] a high right here. So, it is very [15:27] inconsistent. It is very cyclical. Same [15:30] thing if you look at the free cash flow, [15:32] is it consistently increasing like [15:35] Mastercard? No, it is very inconsistent. [15:38] Uh, look at the free cash flow in dark [15:40] green. You can see it goes up, it goes [15:42] down, up, negative, up, flat, and goes [15:46] up. So when it's so inconsistent, what [15:50] would be the free cash flow in the next [15:52] 5, 10, 15 years? We don't know. It's [15:54] very unpredictable. Again, optimists [15:57] would say that it will keep going up [15:59] because now it's doing so well. But [16:02] pessimists would say, no, historically, [16:04] it's been very cyclical. So, you know, [16:07] it's going to start coming down again. [16:09] So which is correct? Honestly, no one [16:11] knows because we can't predict the [16:12] future. All we can do is we just look at [16:14] the past consistency. But the point is [16:17] because of the inconsistency, we cannot [16:19] use the discounted free cash [snorts] [16:22] flow method because if you did, uh what [16:24] would the intrinsic value be? Check it [16:27] out. The intrinsic value [16:29] would be a crazy [16:33] uh $317,000 [16:36] per share. That is the intrinsic value [16:39] if you use this method and if you use [16:41] the projections given by the consensus [16:44] estimates by faxet where they are [16:46] projecting that this company will grow [16:48] 99% a year for the next 5 years and long [16:52] run you'll grow 148% a year. I don't [16:56] know about you but to me I think those [16:57] projections are a bit too optimistic. So [17:00] for companies that have got very [17:02] cyclical profits or very cyclical cash [17:06] from operations uh what's a more [17:08] appropriate valuation method to use? [17:10] Well, normally for these kind of [17:11] companies we use a mean price to sales [17:14] ratio method or a mean price to earnings [17:17] ratio method. So how is this method uh [17:20] used or how is it calculated? Basically [17:22] what we do is we take the 5-year average [17:26] PE ratio. So we take the PE ratio uh we [17:30] take the average of the last 5 years and [17:32] then we multiply the ratio by the [17:35] current earnings per share to get the [17:38] intrinsic value. Now if you don't want [17:41] to do it manually it's all calculated [17:44] for you over here the mean PE ratio [17:47] without uh nonrecurring income. So using [17:51] this method taking the 5-year average PE [17:54] multiplying by the current earnings per [17:56] share that gives us a valuation of 556 [18:01] uh which is what the Oracle value uses [18:05] conservatively. Hence you can see the [18:06] oracle value uh is actually 5.56. If [18:10] you're wondering where this comes from [18:12] it is the mean price to earnings ratio [18:15] without uh nonrecurring income. However, [18:18] if you think that Micron is no longer a [18:21] cyclical business, that for the future [18:23] the sales and profits will grow [18:25] significantly, [18:27] then you could use for example the price [18:31] to sales growth ratio method. And if you [18:34] use this valuation method, you get the [18:36] intrinsic value of $1, [18:39] uh $16. There we are. So that's the [18:41] intrinsic value of Micron if you think [18:43] that it would continue to grow [18:46] significantly for the next 5 10 15 [18:48] years. But again if you think that [18:50] Micron will continue to be a cyclical [18:53] company where the profits will drop once [18:55] the uh supply of memory chips uh ease [19:00] then Micron will be worth $556. [19:04] So that is what we call the valuation [19:07] range. So you can see companies like [19:09] Micron, you know, it could be worth [19:10] $500, could be worth $1,000. So if it's [19:13] worth $1,000, then at today's price, it [19:15] is still undervalued. But if you think [19:17] it's worth $500, then at today's price [19:19] is way overvalued. So these are [19:21] companies that are very very I'm more [19:23] uncertain. And hence, as a long-term [19:25] investor, I tend to avoid companies like [19:28] this because I'm not sure is it worth [19:30] 500, is it worth 1,000? I'm really not [19:32] sure, but I can make money from it as a [19:35] short-term trader using options. So, you [19:38] can see that between the two, Oracle [19:40] Value usually takes the more [19:42] conservative valuation. Hence, it uses [19:45] $500 instead of $1,000. But it's up to [19:48] you. If you are optimistic, by all [19:50] means, use $1,000. And if you do that, [19:53] then Micron is still cheap. Let me give [19:55] you another example. So generally for [19:57] finance companies like insurance [20:00] companies, asset managers, we do not use [20:04] uh discounted free cash flow. So for [20:06] these kind of companies because of the [20:08] nature of their business model using [20:11] cash flow will distort the valuation. So [20:13] instead we have to use a discounted net [20:16] income method. Again these are companies [20:19] uh where their finance firms like asset [20:21] managers uh credit card companies like [20:24] American Express. uh we cannot use the [20:27] cash flow method but bear in mind that [20:28] for banks uh we have to use the mean [20:31] price to book ratio method where we take [20:34] the average price to book ratio for the [20:37] last 5 years and multiply by the current [20:40] book value per share. So let me give you [20:42] an example of a finance company United [20:45] Health. So if you look at United Health [20:48] UNH [20:49] again you can see what is the projected [20:51] growth rate from fact you can see for [20:54] the next 5 years is projected to grow at [20:57] 15.96% [20:59] and then in the longer run grow at [21:01] 13.67%. [21:03] So if we look at the intrinsic value [21:05] again there are so many ways to value [21:08] United Health but it's a insurance [21:10] company. So what's the more um what [21:14] what's the method to use? We use the [21:15] discounted net income method which is [21:18] over here discounted net income method. [21:20] And so based on this method, you can see [21:23] the intrinsic value uh based on [21:26] projecting the net profit for the next [21:28] 20 years discount to present value gives [21:31] us $529. [21:34] That is the uh intrinsic value based on [21:36] the discounted net income. But then you [21:39] may look at Oracle value and say hey [21:42] Oracle value shows only 446. So why is [21:44] Oracle value below that? Very simple [21:46] because Oracle value basically is more [21:49] conservative. So it will tend to take a [21:51] lower growth rate and hence it is 446. [21:55] So Oracle value has a inbuilt AI [21:58] algorithm that will adjust it to make it [22:00] more conservative if it feels that the [22:03] growth projections here are a bit too [22:05] optimistic. So the Oracle value says [22:07] that United Health is worth 446 but the [22:11] discounted net income method says it is [22:14] worth 529. Now does it really matter? It [22:18] doesn't matter. Why? Because right now [22:20] the share price is at 3.84. [22:24] So whether you think it's worth 446 or [22:27] whether you think it's worth uh 529, the [22:31] share price is way below both [22:33] valuations. So that gives a margin of [22:37] safety. And so that's the best time to [22:39] buy a stock when the share price is [22:40] below, you know, all the different [22:43] valuation methods and below your [22:45] valuation range. But of course, don't [22:47] just look at valuation. You have to be [22:48] sure that is a good company in the first [22:50] place, which by the way, I I believe it [22:52] is. Of course, finally, for me, before I [22:55] enter a stock, I don't just look at the [22:57] fundamentals. I don't just look at the [22:58] intrinsic value, but I look at the [23:00] technical analysis as well. I look at [23:02] the chart patterns, right? I want to [23:03] make sure that the the price has waved [23:05] down to a strong support level and it [23:09] has a higher chance of waving back up [23:11] rather than it just dropping dropping [23:13] and then I buy cheap and it can get even [23:15] cheaper in the short term. So, when you [23:17] combine both fundamentals and [23:19] technicals, that's how you're able to [23:21] beat the market consistently. I do hope [23:23] that these two videos have now given you [23:25] a better idea of how I value stocks and [23:28] how I use tools like stock oracle to [23:29] help me to decide on uh what is cheap [23:32] enough to buy. Now obviously there isn't [23:35] time to go through in detail all the [23:37] valuation methods that takes many many [23:39] hours of training. That's what I cover [23:42] in the whale investor course and the [23:44] wealth academy investor master class [23:46] which of course you can enroll for and [23:48] learn everything in depth if that's [23:50] something you're interested in. So do [23:52] use this idea and use all these powerful [23:54] tools to find great companies that are [23:57] undervalued right now because they are [23:58] quite a number that offer compelling [24:00] opportunities. Thank you for watching [24:02] and as always, may the markets be with [24:04] you. If you want to catch my latest [24:06] videos, click on the subscribe button [24:07] right now. Click on the bell so you get [24:10] instant notifications once I upload my [24:12] latest video. If you want to check out [24:14] my online courses, go on to [24:16] piranhaprofits.com [24:18] where you're going to learn how to [24:19] invest and how to trade the financial [24:20] markets and create an income from all [24:23] around the world. If you want to join my [24:25] live Wealth Academy program, go on to [24:28] wealthacademy global.com and find out [24:30] more about how you can learn investing [24:31] and trading live online. This is Adam [24:34] Coup and may the markets be with