Net Present Value (NPV) is one of the most important tools for evaluating whether a stock is overvalued, undervalued, or fairly priced.
It helps investors determine whether they are buying a stock with a high probability of profit—or one that is overpriced and likely to decline.
We’ll use an example to illustrate how NPV works and its value.
- Apple’s NPV Calculation
- We projected Apple’s net profits to grow at 5% per year for the next five years.
- We assumed a terminal value of 2 times Apple’s revenue at the end of year five—a reasonable assumption for a mature company.
- Using an 8% discount rate, the calculated NPV, including net tangible equity, is $1.17 trillion.
- Comparing NPV to Market Cap
- If Apple’s market capitalization is lower than its NPV, the stock is likely undervalued, meaning investors have a higher probability of profiting from the purchase.
- If the market cap is much higher than the NPV, the stock is likely overvalued, meaning investors are paying too much relative to its expected future profits.
- Apple’s market cap today is over $3.5 trillion, or three times its calculated NPV.
- The Most Important Rule for Investors
- Buying stocks where NPV is higher than the market cap increases the probability of strong returns.
- Buying stocks with a market cap much greater than NPV significantly increases the risk of losses, as future profits do not justify the price being paid.
Key Takeaways for Investors:
By using NPV as a guide, investors can avoid overpaying for hype-driven stocks and focus on companies where the expected future profits and terminal value actually support the price they are paying today.
Apple NPV Example
Current Metrics – January 30, 2025
| Market Cap | Revenue | Assumed Revenue Growth Rate | Profit Margin | Net Income | P/S | P/E | Tangible Equity |
| $3.57 tril. | $391 bil. | 5% | 24% | $94 bil. | 9.1 | 38 | $57 bil. |
5-Year Revenue Projections
| Year | Revenue ($ billion) |
Net Income ($ billion) |
NPV of Net Income ($ billion) |
| 0 | $391 | $93.7 | — |
| 1 | $411 | $98.4 | $91.1 |
| 2 | $431 | $103.3 | $88.6 |
| 3 | $453 | $108.5 | $86.1 |
| 4 | $475 | $113.9 | $83.7 |
| 5 | $499 | $119.6 | $81.4 |
| 5-Year Total | $2,269 | $543.8 | $431.0 |
Terminal Value Calculation
| 5th-Year Revenue | $499 billion |
| Terminal Value: 2 x 5th-Year Revenue | $998 billion |
| Discount Rate | 8% |
| NPV of Terminal Value | $679 billion |
Net Present Value Calculation
| NPV of 5 Years’ Income | $431 billion |
| Current Tangible Equity | $57 billion |
| NPV of Terminal Value | $679 billion |
| Net Present Value | $1.17 trillion |
| Market Cap | $3.57 trillion |
| Market Cap as % of NPV | 306% |
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