Here are a few definitions of the term “intrinsic value” in investing.
The intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Additionally, intrinsic value is primarily used in options pricing to indicate the amount an option is in the money.
Motley Fool describes it like this:
Intrinsic value refers to an investor's perception of the inherent value of an asset, such as a company, stock, option, or real estate. Knowing an investment's intrinsic value is useful for value investors who have a goal of buying stocks and other investments at a discount to this amount.
They later add this:
When it comes to stocks, intrinsic value can be tougher to determine since there are multiple calculation methods that can be used. Some economists believe that intrinsic value is the present value of the business’ future cash flows, while others believe that it is simply the value that is justified by the available facts.
For my purposes that last quote is the most useful. They also discuss how to calculate the intrinsic value of a stock using these methods:
- Discounted cash flow analysis
- Analysis based on a financial metric
- Asset-based valuation
They also add this quote, which is again useful for me:
Why it’s useful: The goal of value investing is to seek out stocks that are trading for less than their intrinsic value. There is no one method of evaluating a stock’s intrinsic value, and two investors can form two completely different (and equally valid) opinions on the intrinsic value of the same stock. However, the general idea is to buy a stock for less than its worth, and evaluating intrinsic value can help you do just that.
As I found out when I sold my business, the value of a company is really what other people are willing to pay for it.
