Intrinsic Value
The true underlying value of a business, independent of its current market price. What a rational buyer would pay.
What is Intrinsic Value?
Intrinsic value is what a business is actually worth — based on its fundamentals, earnings power, and future prospects — independent of what the stock market says it's worth today.
The stock market is a voting machine in the short term and a weighing machine in the long term. In the short term, prices are driven by sentiment, news, and speculation. In the long term, prices converge toward intrinsic value. Value investors exploit the gap between the two.
Intrinsic value is not a precise number — it's a range. Different analysts will calculate different intrinsic values for the same company, depending on their assumptions about growth rates, discount rates, and the future. The goal is not precision but a reasonable estimate that gives you a margin of safety.
Market price vs. intrinsic value
Market Price
What the stock market says the company is worth right now. Driven by supply and demand, sentiment, news, and short-term thinking. Can be wildly wrong in either direction.
Intrinsic Value
What the business is actually worth based on its earnings power and future prospects. Changes slowly as the business grows. Rational and grounded in fundamentals.
Value investing is the practice of buying when market price is significantly below intrinsic value — and waiting for the market to recognize the true worth.
Why it matters
If you don't know what a business is worth, you can't know whether you're paying a fair price. Without intrinsic value as an anchor, you're speculating — hoping the price goes up — rather than investing — buying a dollar for fifty cents.
Intrinsic value also gives you the confidence to hold through volatility. If you know a stock is worth $100 and you bought it at $50, a drop to $40 is an opportunity to buy more — not a reason to panic sell.
How it's calculated
There are many ways to estimate intrinsic value. PaybackPrice uses a 10-year earnings projection model (also called a DCF — Discounted Cash Flow — model):
Project future earnings
Use historical EPS growth rate (or analyst estimates) to project EPS 10 years into the future.
Estimate future stock price
Multiply future EPS by a reasonable P/E ratio (based on historical average, capped conservatively).
Discount to present value
Discount the future price back to today using a 15% minimum acceptable return rate. This is the sticker price.
Apply margin of safety
Cut the sticker price in half to get the payback price — the maximum price to pay with a 50% margin of safety.
Limitations
Intrinsic value is an estimate, not a fact. It depends on assumptions about the future that may prove wrong. A company might grow faster or slower than expected. The economy might change. Management might make bad decisions.
This is why the margin of safety is so important. By buying at 50% of intrinsic value, you build in protection against errors in your analysis. Even if you're wrong by 30%, you're still buying at a discount.
Important note
Intrinsic value calculations are most reliable for stable, predictable businesses with consistent earnings growth. They are less reliable for early-stage companies, cyclical businesses, or companies undergoing major transformation.
How PaybackPrice uses it
PaybackPrice calculates intrinsic value (sticker price) for any US stock automatically, using 10 years of historical data. The result is shown alongside the current market price and the payback price, so you can immediately see whether the stock is trading at a discount or premium to its estimated intrinsic value.
See intrinsic value calculated for any US stock — free:
Analyze a stock free →