What is intrinsic value?
Intrinsic value is an estimate of what a stock is actually worth, based on the company’s fundamentals: revenue, profit, cash flow, cash and debt.
Price and value are not the same
The market price changes every day. Intrinsic value changes only when the company’s results or outlook change. The gap between the two is a measure of opportunity: value investors buy when the price is below intrinsic value.
Value investing starts from a simple premise: when you buy a share, you own part of a business. Many investors trade shares without looking at the business behind them.
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Warren Buffett
Why intrinsic value matters
- Higher returns. Stocks bought below their intrinsic value tend to deliver better returns.
- Lower risk. A discount to intrinsic value leaves room for error if the company does worse than you expected.
- Confidence. You know what the company’s financials say the stock is worth, so price swings are easier to sit through.
- Evidence. Academic studies have repeatedly found that value stocks outperform growth stocks and the market as a whole.
How Alpha Spread calculates intrinsic value
There is no single standard formula. Valuation methods fall into two groups:
- DCF valuation values a company by the cash it is expected to generate in the future. What is DCF value?
- Relative valuation compares the stock’s price with how the market prices similar companies, using multiples such as P/E and EV/EBITDA. What is relative valuation?
Each method has strengths and weaknesses. For each company, Alpha Spread uses the method that best fits that company: DCF valuation, multiples-based valuation, or a 50/50 blend of both. The stock page also shows the DCF and multiples-based values separately.