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Intrinsic Value

In the market of finance, the term intrinsic value can have two distinct meanings:

  1. Intrinsic value, is the difference between the strike price of the option and the underlying assets value.
  2. Intrinsic value is also referred to as the 'real' or 'true' value of a company. This holds true in regards to the perception of the investors.

The value of the asset is based upon: Growth potentials, cash flows, and associated risks. To estimate intrinsic value, the discounted cash flow approach is mostly used. Under this approach, the predicted cash flows on the assets are discounted back to a rate that indicates the risks of these cash flows.

An Example:

To understand the concept of what an intrinsic value is, let's look at the example below: Company ABC currently sells stock at $50 per share. It introduced a new product line with a new look and packaging. They also hired a couple of new managers who previously worked for a rival firm. Now, these changes do not appear on the financial statements, but they help to improve Company ABC's competitive advantage. Therefore, the investors may calculate the 'intrinsic value' at a higher rate; say $70 per share, or $20 more than the current selling value.

Hence, there is no one intrinsic value for a stock at any given time. Investors may vary it according to the market conditions, or by calculating the margin of safety.

Calculating intrinsic value:

When valuing options, the formula below is mostly used:

The intrinsic value (options) = (Price of stock - Strike price) x the number of options

How does intrinsic value matter?

The concept of intrinsic value can help to distinguish between growth and value investors. In the former case, the investors rely on money/earnings that can be too high, too low, or unpredictable. However, in the latter case, the investor only buys stocks selling at the rate of the intrinsic value, and wait for the fair value to be realized.

Intrinsic value also takes into consideration the value of intangible assets of the company. For this reason, the investors need to evaluate some factors that will point out indicators that can affect the stock negatively. Companies dominated by intangible assets like technology will usually face a different market and intrinsic values.


Further Reading


What is the Intrinsic Value of the Dow?
onlinelibrary.wiley.com [PDF]
… Street “gurus” and technical and momentum‐based strategies that do not consider intrinsic values … model have surfaced periodically throughout the accounting, finance, and economics literature since the … the intrinsic value defined in equation (1) can be rewritten as the reported …

Earnings, cash flows, and ex post intrinsic value of equityEarnings, cash flows, and ex post intrinsic value of equity
meridian.allenpress.com [PDF]
… Street “gurus” and technical and momentum‐based strategies that do not consider intrinsic values … model have surfaced periodically throughout the accounting, finance, and economics literature since the … the intrinsic value defined in equation (1) can be rewritten as the reported …

The intrinsic value of decision rightsThe intrinsic value of decision rights
onlinelibrary.wiley.com [PDF]
… Street “gurus” and technical and momentum‐based strategies that do not consider intrinsic values … model have surfaced periodically throughout the accounting, finance, and economics literature since the … the intrinsic value defined in equation (1) can be rewritten as the reported …

The Theory of the Stock Intrinsic Value and the Bubble of China's Stock Market <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-JJYJ200502004.htm' />The Theory of the Stock Intrinsic Value and the Bubble of China's Stock Market [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-JJYJ200502004.htm'>PDF]
… Street “gurus” and technical and momentum‐based strategies that do not consider intrinsic values … model have surfaced periodically throughout the accounting, finance, and economics literature since the … the intrinsic value defined in equation (1) can be rewritten as the reported …

An analysis of the deviation of stock market price from its intrinsic value <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-JJYJ200310007.htm' />An analysis of the deviation of stock market price from its intrinsic value [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-JJYJ200310007.htm'>PDF]
… Street “gurus” and technical and momentum‐based strategies that do not consider intrinsic values … model have surfaced periodically throughout the accounting, finance, and economics literature since the … the intrinsic value defined in equation (1) can be rewritten as the reported …

On the relation between ecosystem services, intrinsic value, existence value and economic valuationOn the relation between ecosystem services, intrinsic value, existence value and economic valuation
www.sciencedirect.com [PDF]
… Street “gurus” and technical and momentum‐based strategies that do not consider intrinsic values … model have surfaced periodically throughout the accounting, finance, and economics literature since the … the intrinsic value defined in equation (1) can be rewritten as the reported …

Is the intrinsic value of a macroeconomic news announcement related to its asset price impact?Is the intrinsic value of a macroeconomic news announcement related to its asset price impact?
www.sciencedirect.com [PDF]
… Street “gurus” and technical and momentum‐based strategies that do not consider intrinsic values … model have surfaced periodically throughout the accounting, finance, and economics literature since the … the intrinsic value defined in equation (1) can be rewritten as the reported …

Price‐Earnings and Price‐to‐Book Anomalies: Tests of an Intrinsic Value ExplanationPrice‐Earnings and Price‐to‐Book Anomalies: Tests of an Intrinsic Value Explanation
onlinelibrary.wiley.com [PDF]
… Street “gurus” and technical and momentum‐based strategies that do not consider intrinsic values … model have surfaced periodically throughout the accounting, finance, and economics literature since the … the intrinsic value defined in equation (1) can be rewritten as the reported …

Currency returns, intrinsic value, and institutional‐investor flowsCurrency returns, intrinsic value, and institutional‐investor flows
onlinelibrary.wiley.com [PDF]
… Street “gurus” and technical and momentum‐based strategies that do not consider intrinsic values … model have surfaced periodically throughout the accounting, finance, and economics literature since the … the intrinsic value defined in equation (1) can be rewritten as the reported …

Asset pricing and intrinsic values: A review essayAsset pricing and intrinsic values: A review essay
www.nber.org [PDF]
… Street “gurus” and technical and momentum‐based strategies that do not consider intrinsic values … model have surfaced periodically throughout the accounting, finance, and economics literature since the … the intrinsic value defined in equation (1) can be rewritten as the reported …



Q&A About Intrinsic Value


When do you use an equity valuation model to calculate the intrinsic values of companies?

You should use an equity valuation model when there are no dividends or cash flows from investments in order to find out how much money investors would be willing to pay for each share of stock.

How can you distinguish growth from value investors?

Growth investors rely on money-earnings that are too high, too low, or unpredictable while valuing companies using discounted cash flow approach to estimate their true or real values. On the other hand, Value Investors rely on fundamental analysis and try to find undervalued stocks in order to make profits over long periods of time.

How do you calculate intrinsic value?

To calculate intrinsic value, use this formula below

What is the difference between intrinsic value and market value?

The term "intrinsic value" has two distinct meanings. In one case, it refers to the difference between the strike price of an option and the underlying asset's current market price. In another case, it refers to what investors perceive as a company's true or real value.

What does intrinsic value measure?

Intrinsic value measures the worth of a company.

When might you need more than one type of equity valuation model ?

If your business has multiple sources of income (dividends as well as capital gains), then you will probably need more than one type of equity valuation model .

How can you determine intrinsic value?

You can determine intrinsic value by calculating the present and future cash flows of a company.

What are some factors that affect intrinsic value?

Some factors that affect intrinsic values include interest rates, inflation, and risk premiums.

What is another name for an equity valuation model ?

Another name for an equity valuation model is discounted cash flow analysis .

What is intrinsic value?

Intrinsic value is the actual worth of a company.

Who uses equity valuation models most often?

Equity valuation models are used most often by financial analysts who work for investment banks, mutual funds, pension funds, and other organizations that manage large sums of money on behalf of others.

Why would you want to know how much money investors would be willing to pay for each share of stock?

Knowing this information helps you decide whether or not it's a good time to buy shares in a particular company.

What does it mean when you say that there is no one intrinsic value for a stock at any given time?

There is no single intrinsic value for a stock at any given time because investors may vary their estimates based on market conditions or by calculating the margin of safety.