How to Value a Stock in Under 2 Minutes (Beginner-Friendly)

Valuing a stock doesn’t need to take hours of research or complex Excel spreadsheets. The 2-Minute Valuation Model that we’ll talk about today is an incredibly handy tool for investors to quickly assess whether a stock is overvalued or undervalued.

Even if math was your least favorite subject in school, and it feels like you’re reading another language when you learn about stocks, this stock valuation method that we’ll cover today will be simple and straightforward.

As long as you can do math at a third-grade level (addition/subtraction, multiplication/division), then this is going to make sense for you, and with practice, you’ll be able to value stocks in under 2 minutes!

In this article, we’ll break down the steps to value a stock with the 2-Minute Valuation Model, show you how it all works, and we’ll look at how you can double-check the accuracy of your valuation so you can confidently find undervalued stocks.

What is the 2-Minute Valuation Model?

The 2-Minute Valuation Model follows this simple formula:

Expected Normalized EPS × Forward P/E Ratio = Expected Share Price

Let’s break down these key components:

• Expected Normalized EPS: This is the company’s expected earnings per share, adjusted to give a clearer picture of a company’s sustainable profitability.
• Forward P/E Ratio: This is the Price-to-Earnings multiple you expect the stock to trade at based on the company’s growth prospects, historical averages, or industry norms.

If this still doesn’t make sense—don’t worry.

I promise that when you see this in action, everything will click, and before the end of today, you’ll be able to use this valuation framework to find undervalued stocks.

First, we’ll use the 2-Minute Valuation Model to value Google (GOOGL) stock so you can see it in action.

Then, we’ll look at why it all works so you can start using the valuation model yourself to find undervalued stocks.

Let’s dive in!

Step-by-Step Guide: Valuing Google Stock

Today, the 2-Minute Valuation Model values Google at $261/share, which implies that the stock has over 30% upside over the next 2 years.

As a quick reminder, we’re using the formula below for this valuation:

Expected Normalized EPS × Forward P/E Ratio = Expected Share Price

We’ll value Google (GOOGL) stock using TIKR.com. If you don’t already have an account, I’d highly recommend you sign up for free today, so you can follow along for yourself!

1. Estimate Normalized EPS

First, we’re going to estimate the stock’s normalized earnings-per-share 3 years from now.

On Google’s Analyst Estimates tab shown below, you can see analysts expect the company to grow revenue at an 11.1% compound annual growth rate (CAGR) over the next 3 years, with normalized earnings per share, or EPS, expected to grow at 13.9% per year:

View Google’s full analyst estimates >>>

In 2027, analysts expect Google to make $11.78 in normalized EPS.

We’ll use this in our formula for estimated EPS.

Over the past 5 years, Google’s revenue grew at a 16.7% CAGR while normalized EPS grew at a 24.9% CAGR.

Therefore, it seems pretty reasonable that analysts estimate that Google will grow revenue at 11% annually, and earnings at nearly 14% annually.

We can update our formula to show:

Expected Normalized EPS ($11.78) × Forward P/E Ratio = Expected Share Price

2. Determine a Fair P/E Multiple

Next, we’re going to find a reasonable P/E valuation multiple that we think the stock could trade at 3 years from now.

We can use TIKR’s Valuation tab to see that Google currently trades at just over 22 times next year’s expected earnings. This means that the stock currently has a 22x NTM (next-twelve months) P/E multiple.

This is a slightly lower multiple than the stock has seen in the past, because Google has averaged a 24x forward P/E multiple over the past 5 years:

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We can generally pick a fair multiple for a stock by:

1. Seeing what multiple the stock has traded at historically
2. Looking at the stock’s expected EPS growth
3. Factoring in other risks/opportunities

Google has averaged a 24x P/E ratio over the past 5 years, but this was during a time when the company’s growth was a little higher.

Now, the multiple is slightly lower, with the stock expected to see slightly lower growth.

Since Google is expected to grow revenue at 11% annually and EPS at 14% annually, I’ll use a 22x forward P/E ratio in our valuation to be a bit more conservative.

We can update our formula to show:

Expected Normalized EPS ($11.78) × Forward P/E Ratio (22x) = Expected Share Price

3. Find the Fair Value & Expected Returns

Last, we’re going to multiply out the formula and add in any dividends that Google is expected to pay over the next 2 years.

Google has a 2-year expected share price of $259/share:

Expected Normalized EPS ($11.78) × Forward P/E Ratio (22x) = Expected Share Price ($259/share)

Side Note: The NTM P/E multiple uses the next twelve months’ expected earnings, which is why a 2-year valuation uses 3-year EPS forecast figures.

We can tack on an extra $2 per share for the dividends that TIKR’s Analyst Estimates tab says that Google is expected to pay over the next 2 years (2025 & 2026’s dividend figures), which brings the final 2-year fair value estimate to $261/share:

We can use Calculator.net’s Investment Calculator to see that with the stock trading at about $196 today, Google stock could rise 15.4% annually over the next 2 years, or 33% in total:

At this point, you have everything you need to find out if a stock is over or undervalued. You could take a handful of high-quality stocks, and use the 2-Minute Valuation Model to see if they look undervalued.

At the time of writing this article, ASML, GOOGL, MSFT, and PFE were a few stocks that looked interesting when I ran them through the model.

Find the best stocks to buy today with TIKR >>>

But, you’re probably wondering, “How accurate is this?”

This is how you can verify the valuation you get with the 2-Minute Valuation Model, so you can feel confident in your valuation and protect your hard-earned money!

4. Verify Your Valuation

We can verify our Google valuation by referencing analysts’ consensus price target for Google.

The analysts’ consensus price target is the average price that analysts think the stock will trade at in 0-18 months.

Put simply, it’s the average price that a big group of smart people think the stock is worth.

For big companies like Google, this consensus price target is pretty significant because this is the average price target across 60+ analysts that cover the stock.

Today, analysts have a target stock price of about $211/share for Google, which means that with the stock trading at $196/share, analysts think the stock has nearly 8% upside in the next 18 months:

You can see that analysts have a bit of lower price target for Google than we got when we did our valuation.

Now might be a good time to revisit the key assumptions used in our model. For Google, this means:

1. Maybe forecasted EPS is too high?
2. Maybe our P/E multiple is too high?

Additionally, analysts’ price targets aren’t always accurate, and can suffer from many biases:

• Over-Optimism Bias: Analysts may overestimate a company’s future earnings or growth potential, especially for popular or high-growth stocks.
• Herding Bias: Analysts might adjust their estimates to match the consensus to avoid standing out, even if they believe differently.
• Confirmation Bias: Analysts may focus on data that supports their existing views and ignore conflicting evidence.
• Conflict of Interest Bias: Relationships with the company or pressure from investment banking clients can lead to overly positive estimates.
• Conservatism Bias: Some analysts might play it safe by underestimating potential growth or risks to avoid being wrong.

Still, looking at analysts’ consensus price targets can be a great way to get a “second opinion” on your own stock valuation.

Even if it doesn’t look like Google offers as high of returns as it might have initially looked, Google is still a Magnificent 7 stock with a wide moat that’s expected to see double-digit earnings growth.

See Price Targets Over Time

It helps to see how analysts have predicted a stock’s price target over time.

If analysts have been consistently accurate with their price targets, that might positively influence how you see their ratings, while if they’ve consistently missed the boat, you might put less consideration into their price targets.

You can see that analysts thought Google was undervalued towards the end of 2022 and into 2023, and this turned out to be accurate. Analysts still think the stock has about 10% upside today:

Now, we need to talk about why this 2-Minute Valuation Model actually works and why it’s worth using.

Now that you know how to use this framework, you might feel tempted to skip over this part.

Don’t skip this part, because this is really important.

Understanding why the model works will help you feel confident in your investing ideas, and avoid making foolish investing mistakes that end up costing you.

This will be easy to understand, quick to read, and you’ll be able to use this to start finding undervalued stocks!

How this Model Works

This model focuses on finding the true intrinsic value of a stock by focusing on the three fundamental drivers of a stock’s long-term value:

1. Revenue Growth: How big the business becomes.
2. Margins: How much the business earns in profit.
3. Valuation Multiple: How much investors are willing to pay for a business’s earnings.

These are the 3 major components that impact a stock’s long-term value.

As Ben Graham once said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

The stock market might move randomly in the short-term, but over time, growth in a company’s stock price will reflect the growth in the value of the stock’s underlying business.

Put simply, if the business grows, then the stock will grow.

These are the 3 key components that drive value for any kind of business and make stocks go up over the long-term:

Breaking Down the Key Components

Revenue Growth

Revenue growth measures how much a company’s sales increase over a certain time. Growing revenue is important because it helps the company make more money in the future. If a company keeps growing its sales, it can increase its earnings and become more profitable.

Profit Margins

Profit margins show how much money a company keeps as profit from its sales. They help you see if the company is managing its costs well and if customers are willing to pay for its products. Higher margins are good because they show the company makes more profit and runs efficiently.

Valuation Multiple (P/E Ratio)

The Price to Earnings ratio (P/E) shows how much investors pay when they purchase a stock for every dollar a company earns. A high P/E ratio is more expensive and might make sense for a fast-growing company, while a low P/E ratio is cheaper and might be appropriate for a company with slower growth or higher risks.

These 3 Components are the Basis of Every Stock Idea

If your head is spinning right now—don’t worry!

This is all much simpler than you think.

The components that we’re talking about (revenue growth, margins, and valuation multiples) are the basis behind practically every story that you’ll ever encounter about why a stock is over or undervalued:

1. Amazon: “Amazon’s e-commerce dominance and AWS cloud growth fuel massive reinvestment into new opportunities.”
   • Strong revenue growth with high margins.
   • High growth potential supports a higher valuation multiple.
2. Microsoft: “Microsoft’s cash cows like Windows and Office fund rapid growth in Azure cloud services.”
   • Revenue growth with high margins.
   • Cloud leadership supports its valuation multiple.
3. Netflix: “Netflix’s global subscribers and popular original content create consistent growth opportunities.”
   • Revenue growth
   • Growth potential can support the valuation multiple.

Practically every stock thesis boils down to a company being able to grow revenue, improve profit margins, and/or trade at a higher multiple.

That’s why the 2-Minute Valuation Model focuses exclusively on these 3 components:

1. Expected Normalized EPS: A reflection of expected revenue growth & margins
2. P/E Multiple: Expected valuation multiple

But if you’re thinking, “Aren’t there other pieces that play into a stock’s valuation, like dividends?”

I call capital allocation the silent component in finding a stock’s valuation.

The “Silent Component”

When we use the 2-Minute Valuation Model, we simplify our thinking about a stock down to just its expected revenue growth and margins (normalized EPS) and its valuation multiple.

But, there is one more silent component in a stock’s long-term intrinsic value, which is capital allocation.

Capital allocation is a fancy way to say that how a company uses the money it makes, AKA capital, is important for a stock’s long-term return.

Capital allocation decisions, like how money should be invested within a company, are big, important decisions that can make or break a business over the long-term.

A company’s CEO and executive management team are responsible for these decisions, which is why successful CEOs can get paid millions of dollars.

Dividends and share buybacks are important for a stock’s intrinsic value, but both are funded by a company’s earnings. That means dividends and share buybacks are ultimately part of capital allocation.

How a company uses its capital can be the difference between driving shareholder value or wasting a company’s profits. Some capital allocation decisions that management teams make are:

1. Reinvest for growth or return capital to shareholders as dividends?
2. Buy back shares or pay down debt?
3. Pursue acquisitions or focus on internal growth?
4. Invest in new products or expand existing products?
5. Build cash reserves or return cash to shareholders?

Capital allocation is the “silent component” because these items can be tough to measure, but they have a large impact on a company’s long-term earnings, and in turn, a stock’s long-term value.

For now, don’t worry about these components; just know that if you’re looking for stocks to invest in for the long term, you should focus on investing in high-quality businesses. High-quality businesses tend to become high-quality because they make good capital allocation decisions.

You could update our initial 3 key components to say that a stock’s long-term value drivers are:

1. Revenue Growth: How big the business becomes.
2. Margins: How much the business earns in profit.
3. Valuation Multiple: How much investors are willing to pay for a business’s earnings.
4. Capital Allocation Decisions: How management invests/distributes a company’s earnings.

Let’s look at one more example of how to use the 2-Minute Valuation Model where we’ll value ASML stock.

Then, you’ll be ready to use this framework to start finding undervalued stocks for yourself!

Case Study: Valuing ASML Stock

We’ll look at another example so you can see how to put this into action and find undervalued stocks.

The 2-Minute Valuation Model values ASML Holdings (ASML) at $1,201/share in 2 years. ASML makes machines that are necessary for creating some of the world’s most advanced semiconductors.

This implies that the stock has over 50% upside from its current share price.

As a quick reminder, we’re using the formula below to value ASML with the 2-Minute Valuation Model:

Expected Normalized EPS × Forward P/E Ratio = Expected Share Price

We’ll value ASML stock using TIKR.com.

Get accurate financial data on over 100,000 global stocks for free on TIKR >>>

1. Estimate Normalized EPS

First, we will estimate ASML’s normalized earnings-per-share 3 years from now.

On ASML’s Analyst Estimates tab shown below, you can see analysts expect the company to grow revenue at a 13.8% CAGR over the next 3 years, with normalized earnings per share, or EPS, expected to grow much faster at 23.9% per year because analysts expect the company to see bigger profit margins:

View ASML’s full analyst estimates >>>

In 2027, analysts expect ASML to earn $38.19 in normalized EPS.

Over the past 5 years, ASML’s revenue grew at an 18.9% CAGR while normalized EPS grew at a 25.4% CAGR. Therefore, it seems pretty reasonable that analysts estimate ASML’s revenue will grow at about 14% annually and earnings will grow at nearly 24% annually.

We can update our formula to show:

Expected Normalized EPS ($38.19) × Forward P/E Ratio = Expected Share Price

2. Determine a Fair P/E Multiple

Next, we will find a reasonable P/E valuation multiple that we think the stock could trade at 3 years from now.

ASML currently trades at nearly 30 times next year’s expected earnings. ASML has averaged a 35.6x forward P/E multiple over the past 5 years, so that means the stock is trading at a historically cheap multiple:

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Since ASML is expected to see similar growth to what it’s seen in the past, we’ll use a 31x forward P/E multiple, which is the stock’s average multiple over the past 10 years.

We can update our formula to show:

Expected Normalized EPS ($38.19) × Forward P/E Ratio (31x) = Expected Share Price

3. Find the Fair Value & Expected Returns

Last, we can multiply out the formula, and add in the dividends that ASML is expected to pay.

When we multiply the formula, it looks like Google has an expected share price of $259/share:

Expected Normalized EPS ($38.19) × Forward P/E Ratio (31x) = Expected Share Price ($1,184/share)

3 years from now, ASML is expected to reach about $38.19 in normalized EPS. At a 31x NTM P/E multiple, that values the stock in 2 years at $1,184/share.

(The NTM P/E multiple uses the next twelve months’ expected earnings, so a 2-year valuation uses 3-year EPS forecast figures.)

We can tack on an extra $17 per share for the dividends that ASML is expected to pay over the next 2 years (2025 & 2026’s dividend figures), bringing the final fair value to $1,201 per share:

With the stock trading at about $716 today, this implies that ASML stock could rise 29.5% annually over the next 2 years, or 68% in total, to reach this fair value:

Now, this sounds pretty terrific, but you’re probably wondering, “How accurate is this?”

Let’s look at what analysts think ASML is worth so we can get a second opinion on our valuation.

4. Verify Your Valuation

We can verify our ASML valuation by referencing analysts’ consensus price target for ASML.

For mega-cap companies like ASML, this consensus price target is pretty significant because dozens of analysts cover the stock, and this is the average price target across all these analysts.

Today, analysts have a target stock price of about $869 per share, which means that with the stock trading at $716/share today, analysts think the stock has nearly 26% upside in the next 18 months:

We might reconsider our normalized EPS and P/E multiple assumptions that we used, but either way, analysts still think ASML has substantial upside in the next year and a half!

See Price Targets Over Time

You can see that analysts correctly thought that ASML was undervalued towards the end of 2022.

Now that the stock has dipped, analysts again think the stock has a decent upside today:

The 2-Minute Valuation has its drawbacks, which are important to understand so you can get the most out of this valuation tool and avoid making any investing mistakes.

Limitations of the 2-Minute Valuation Model

This simple model won’t capture every nuance of a stock’s valuation, but it is a quick way to get a rough valuation and narrow down your choices for deeper research.

The 2-Minute Valuation Model is a great starting point, but it has its limitations:

1. Ignores Qualitative Factors

The model focuses solely on EPS and P/E, leaving out important non-financial aspects like competitive advantages, industry dynamics, macroeconomic risks, and management quality.

That’s why it’s recommended to use this valuation model on companies that you already know have a competitive advantage.

Example:

• A company like Tesla might appear overvalued based on its high P/E ratio, but its strong brand, cutting-edge technology, and leadership in the EV market could justify its premium valuation.
• On the flip side, a company with a low P/E might face risks like poor management or declining market share that the model doesn’t account for.

2. Volatility in EPS and P/E Ratios

The model assumes EPS and P/E ratios stay steady, but these can be highly volatile due to unexpected events, market sentiment, or macroeconomic conditions.

Example:

• During a recession, a company’s earnings may temporarily decline, making its EPS look weak. This could result in a lower estimated valuation even though the business still has strong fundamentals.
• Similarly, market hype can inflate the P/E of a growth stock, leading to an overvaluation.

3. Oversimplification

The model provides a quick estimate of a stock’s value but lacks the depth needed for thorough financial analysis. It may not capture complex aspects like debt levels, cash flows, or one-time events that impact value.

Example:

• A company with significant debt might look undervalued based on EPS and P/E, but deeper analysis could reveal financial risks that aren’t reflected in this simplified approach.

Tips for Using the 2-Minute Valuation Model Effectively

To make the most of the 2-Minute Valuation Model, consider these tips:

1. Cross-check with Other Valuation Methods

While this model is quick, combining it with more detailed methods like a Discounted Cash Flow model (DCF) or looking at other valuation multiples like EV/Revenue or EV/EBIT can provide a fuller picture.

Example:

• For a stable utility company, using a DCF model might highlight its long-term cash flow stability, while EV/EBITDA could reveal how it compares to peers.
• If the P/E-based valuation aligns with these methods, it adds confidence to your estimate.

2. Adjust for Cyclical Industries

P/E ratios in industries like energy, materials, or airlines can vary significantly depending on economic cycles. When you’re looking at companies in cyclical industries, it’s important you adjust your assumptions based on where the company is in the cycle.

Example:

• For an oil company during a boom, the current P/E ratio might look low due to high earnings. Adjusting for normalized EPS based on long-term average oil prices can provide a more realistic valuation.
• Earnings may drop for a retail company during an economic downturn as consumers spend less. This could make the P/E ratio look unusually high, but adjusting for normalized EPS based on average spending levels during stable times can give a more accurate valuation.

3. Use as a Screening Tool

You can try using the 2-Minute Valuation Model as a way to filter potential opportunities for deeper research and qualitative analysis rather than using the tool as a final decision-maker.

Example:

• If a stock’s estimated valuation suggests it’s undervalued, dig deeper into its financials, industry trends, and qualitative factors.
• Conversely, if the stock looks overvalued, further research might reveal hidden growth drivers or risks.

The 2-Minute Valuation Model can be a powerful first step you can use in your investing process.

FAQs

What is a quick way to value a stock?

A quick way to value a stock is using the 2-Minute Valuation Model, where Expected EPS × P/E Ratio = Expected Share Price.

How do you calculate normalized EPS?

Normalized EPS is calculated by adjusting reported earnings to exclude one-time items, providing a clearer view of the company’s normal, average earnings.

What is a fair P/E multiple for stock valuation?

A fair P/E multiple depends on a company’s growth prospects, industry standards, and historical averages. Investors can use a P/E ratio that a stock has averaged in the past or pick a P/E ratio that makes sense based on the business’s expected EPS growth.

How do analysts determine price targets?

Analysts set price targets by estimating how much money a company will earn in the future and applying a valuation multiple, which shows what investors might pay for each dollar of earnings. They also consider things like the company’s strengths, risks, and market conditions to make their predictions more accurate.

Why is verifying your valuation with consensus price targets helpful?

Analyst price targets provide a benchmark for validating your valuation and accounting for factors beyond basic calculations.

TIKR Takeaway

The 2-Minute Valuation Model offers investors a simple and effective way to estimate the value of a stock using a simple formula:

Expected EPS × P/E Ratio = Expected Share Price

When combined with analyst price targets and additional research, this model can be a powerful tool in your investing toolkit.

The TIKR Terminal offers industry-leading financial information on over 100,000 stocks, helping you find the best stocks today.

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Disclaimer:

Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!