Intrinsic Value
In short
What a stock is truly worth based on fundamentals, not market price
The market price is what people are willing to pay right now. Intrinsic value is an estimate of what the stock is actually worth based on the company's cash flows and assets. If a $40 stock has an estimated intrinsic value of $55, the gap ($15) is what practitioners call the margin of safety.
Intrinsic value is an estimate, not an observable fact — it depends entirely on the inputs and model used to derive it, whether a DCF's growth and discount-rate assumptions, a DDM's dividend growth assumption, or the peer multiples used in a comps analysis. Two analysts applying the same framework to the same company can reach materially different figures. The concept, popularized by Benjamin Graham and later Warren Buffett, treats the gap between an estimated intrinsic value and the current market price as a 'margin of safety': the larger the gap, the more room there is for the estimate to be wrong and still not overpay. Because these estimates are sensitive to assumptions, practitioners typically triangulate across several methods rather than treating any single number as precise.
Formula
Intrinsic Value = f(DCF, DDM, Comps, Asset Value)Related concepts
- DCF Model — Imagine a friend promises to pay you $100/year for 10 years. Would you pay $1,000 today? Not quite — money tomorrow is worth less than money today. DCF calculates what future cash flows are worth right now.
- Margin of Safety — If you think a stock is worth $100, don't pay $100 — pay $70. That 30% discount is your margin of safety. If your estimate is wrong, you still might not lose money.
- P/E Ratio — Imagine buying a lemonade stand that makes $100/year. If it costs $2,000, the P/E is 20 — you need 20 years of earnings to pay it off. Lower means cheaper.