Intrinsic value
What is Intrinsic value?
Intrinsic value is an analyst's estimate of an asset's economic worth based on expected cash flows, risk, growth, and other fundamental assumptions. It is a reasoned range under uncertainty, not a directly observable market fact.
Intrinsic value versus price
Market price is observable and reflects the terms at which participants currently trade. Intrinsic value is model-dependent and unobservable. Investors compare the two to identify a possible margin of safety, but disagreement does not prove the market is wrong. The estimate must explain why cash flows or risk are assessed differently from prevailing expectations.
How it is estimated
Common approaches include DCF, dividend discount, residual income, asset value, and liquidation value. Each requires internally consistent forecasts and discount rates. Relative multiples can inform assumptions but primarily estimate value from comparable market pricing. A robust analysis uses more than one perspective and explains why each method is suitable for the business.
Example
An analyst estimates a share's intrinsic value between $70 and $90 under reasonable scenarios while market price is $60. The range, not only its midpoint, matters. If value depends on a narrow combination of high growth and low discount rates, the apparent discount may not provide a genuine margin of safety.
How to interpret it
Treat value as a distribution or scenario range. Identify evidence that would change revenue, margins, reinvestment, competitive advantage, balance-sheet risk, or required return. Compare the model's implied expectations with market price. Update for new information without changing assumptions merely to preserve the original conclusion.
Limitations
Every intrinsic estimate depends on uncertain future outcomes and model structure. Behavioral bias can make analysts choose inputs that justify a preferred answer. Intangible assets, optionality, financial distress, and rapidly changing industries are difficult to model. A detailed spreadsheet can conceal rather than reduce uncertainty if inputs lack evidence.
Practical checklist
Use documented scenarios, consistent cash flows and discount rates, and an explicit valuation date. Reconcile operating value to common equity and diluted shares. Compare methods, test sensitivities, and record disconfirming evidence. State a range and required margin of safety, then distinguish changes caused by business fundamentals from changes caused only by market price.
Also known as: fundamental value