Intrinsic Value

Intrinsic value is an estimate of what a company is truly worth based on its fundamentals, such as future cash flows, rather than its current market price. It is the cornerstone of value investing, which seeks to buy stocks trading below their intrinsic value. Because it depends on assumptions, intrinsic value is an informed estimate, not a precise figure.

Estimate intrinsic value with methods like discounted cash flow analysis, then compare it with the market price to judge whether a stock is cheap or expensive. Build in conservative assumptions and a margin of safety to protect against errors. Different reasonable assumptions yield different values, so treat intrinsic value as a range rather than a single number.

If a discounted cash flow model values a company at 80 dollars per share but the stock trades at 60 dollars, a value investor sees a 25 percent discount to intrinsic value and a potential opportunity, assuming the assumptions hold.