Intrinsic Value vs. Current Market Value: An Overview
There is a significant difference between intrinsic value and market value, though both are ways of valuing a company. Intrinsic value is an estimate of the value of a company based on its expected capacity to produce future free cash flows throughout its life. It is an internal value regardless of what the market sets as a value for it at a specific point in time.
Market value is the current value of a company as reflected by the company's stock price. Therefore, market value may be significantly higher or lower than the intrinsic value. Market value is also commonly used to refer to the market capitalization of a publicly-traded company and is obtained by multiplying the number of its outstanding shares by the current share price.
Key Takeaways
- Intrinsic value and market value are two distinct ways to value a company.
- Market value is simply a measure of how much the market values the company, or how much it would cost to buy it.
- Market value is easy to determine for publicly traded companies but can be a little more complicated for private companies.
- Intrinsic value is an estimate of the actual value of a company, separate from how the market values it.
- Value investors look for companies with higher intrinsic value than market value. They see this as a good investment opportunity.
Intrinsic Value
Intrinsic value is a core metric used by fundamental analysis-based investors to analyze a company. The idea is that it is best to invest in companies that have a higher true value than the one being assigned to it by the market. Intrinsic value is a type of fundamental analysis. Tangible and intangible factors are considered when setting the value, including financial statements, market analysis, and the company's business plan.
There is an inherent degree of difficulty in arriving at a company's intrinsic value. Due to all the possible variables involved, such as the value of the company's intangible assets, estimates of the genuine value of a company can vary greatly between analysts.
Some analysts utilize discounted cash flow analysis to include future earnings in the calculation, while others look purely at the current liquidation value or book value as shown on the company's most recent balance sheet. Further, difficulty arises from the fact that the balance sheet itself since it is an internally produced company document and may not be a completely accurate representation of assets and liabilities.
Market Value
Market value is the company's value calculated from its current stock price and rarely reflects the actual current value of a company. Market value is, instead, almost more of a measure of public sentiment about a company. The reason for this is that the market value reflects supply and demand in the investing market, how eager (or not) investors are to participate in the company's future. Another difficult factor in determining market value is how to value illiquid assets such as real estate and business lines.
The market value is usually higher than the intrinsic value if there is strong investment demand, leading to possible overvaluation. The opposite is true if there is weak investment demand, which can result in the undervaluation of the company.
