Intrinsic Value vs Market Value: A Quick Guide - No BS Investing
Posted 207 views September 16, 2022, 10:10 - Elisabeth in Investing

Intrinsic Value vs Market Value: A Quick Guide

What is intrinsic value vs market value? 

Intrinsic value shows what you believe a company to be actually worth. Market value, or the stock’s current market price, shows you what the market believes a company is worth. Here are the key differences between the two concepts for value investors.

Key Takeaways:

  • Intrinsic value (also known as book or fair market value) is what you believe a company to actually be worth, based on multiple factors.
  • Market value is what the market believes a company to be worth. It’s reflected by its stock price and market cap.
  • When the market price is higher than the company’s intrinsic value, the stock might be overvalued
  • If the intrinsic value is higher than the market value, the stock might be undervalued (the sweet spot for value investors). 
  • Price-per-earnings multiple is one way to calculate intrinsic value: Earnings per share (EPS) x P/E ratio x (1 + r)^5. 
  • Market value is either the current stock price or the market cap (Current Share Price * Total Number of Outstanding Shares).
intrinsic value vs market value

What is intrinsic value?

Intrinsic value (also known as book or fair market value) is what you believe a company to actually be worth, based on multiple factors.

Benjamin Graham, the father of value investing, and David Dodd defined intrinsic value as “the value determined by tangible fundamentals, including earnings, operating cash flow, and dividend payments.”

The straightforward way to calculate intrinsic value is to subtract a company’s total liabilities from its total assets (e.g., cash reserves, equipment, corporate bonds, etc.). But the problem is that investors can calculate intrinsic value differently. For example, should you include intangible assets like goodwill in your calculation? It’s impossible to get a precise estimation, and different investors will come to their own conclusions.

Here are two more in-depth methods to help you better estimate intrinsic value:

  • Price-to-earnings (P/E) multiple: Calculate intrinsic value through a five-year price target.
  • Discounted cash flow (DCF) model: Estimate value based on expected future cash flows.

Stock prices are known to everyone, but intrinsic value is always an estimate based on assumptions. It’s impossible to determine the exact value of a company because the value is based on projections of future growth and other assumptions. 

Be conservative with your intrinsic value estimates to protect yourself from mistakes.

What is market value?

Market value is what the market believes a company to be worth. With investing, market value is reflected in the current stock price. It shows what investors are willing to pay to invest in the company. 

For example, if a stock is selling for $10 per share, this is its market value. Market value is based on supply and demand. Stock prices rarely reflect the true value of a company. Instead, they are driven by emotions and events, such as:

  • News headlines
  • New company information
  • Stock market crash

The market price rises above or drops below the company’s intrinsic value when there’s a strong demand for the stock from investors. It drops below the company’s intrinsic value when investors don’t recognize 

For example, maybe a company begins selling a popular product. Sales suddenly skyrocket. In turn, the stock price increases as investors review earning reports. Or maybe the prosperous CEO of a company leaves. Stock prices suddenly decrease with investor pessimism. 

To know the market value, look at the company’s stock price. Or calculate the company’s total market value by multiplying a company’s outstanding shares by its current market price. 

Intrinsic value vs market value

When the market price is higher than the intrinsic value, the stock might be overvalued. If the intrinsic value is higher than the market value, the stock might be undervalued (the sweet spot for value investors). 

Value investors look at a company’s intrinsic value because stock prices or the market value reflect investors’ perception of reality, not necessarily reality itself. Value investors can take advantage of this. 

Let’s look at intrinsic value and market value in action with value investing. Say that you believe the per-share intrinsic value of XYZ Company is $15.00. The stock is selling at a market price of $11.50. Do you believe the stock is

  • Undervalued
  • Fairly valued
  • Overvalued

The correct answer is A. The stock is undervalued. You believe the XYZ Company stock is worth $3.50/share more than its current price. You might purchase the stock based on this calculation. 

Hint: Use a stock screener like Investing Pro Plus to easily calculate intrinsic value and view market value. 

How to calculate intrinsic value

Here’s one of the most common methods to calculate intrinsic value: the P/E Multiple Model.

Price-to-earnings or P/E multiple is a method that helps you calculate intrinsic value through a five-year price target. It’s a straight-forward method that requires three inputs.

Intrinsic value = Earnings per share (EPS) x P/E ratio x (1 + r)^5 

Let’s calculate the five-year price target for Microsoft:

  • Input 1 (EPS): 8.94
  • Input 2 (P/E Ratio): 36.59
  • Input 3 (Expected Growth Rate): 12.56%

Place these inputs in the formula: Earnings per share (EPS) x P/E ratio x (1 + r)^5. We recommend using a scientific calculator: 

8.94 per share x 36.59 x (1 + 0.1256)​^5 = $591.04 per share

This means that Microsoft’s intrinsic value will be $591.04 five years from now. But we need to calculate the intrinsic value today to compare it with the current stock price. This means we must discount the five-year price target to get the Net Present Value.

Using a 9% discount rate (based on the historical return of the stock market), we’ll divide the original amount by 9%:

591.04 / (1 + 0.09)^5 = $388.04

If Microsoft’s current stock price is $330, the company seems to be slightly undervalued. However, this is a rough estimate. You could also use the Discounted Cash Flow (DCF) model or the Return on Equity Valuation Model to get more estimates. 

Finally, combine results from different methods to get a value range. Focus on conservative estimates.

Related: What are Value Traps?

How to calculate market value

Calculating market value is easier. Look at the company’s current stock price. Or calculate the company’s market capitalization or market cap. Here’s the market cap formula:

Market Cap = Current Share Price * Total Number of Outstanding Shares

For example, XYZ Company trades at $15 per share and has 1 million shares outstanding. Its market value (or market cap) is $15 million. If you want to know the current stock price, divide the market cap by the company’s number of shares. 

Calculate intrinsic value with a stock research and analysis tool

Want to simplify company valuations so you can invest with confidence? We recommend Investing Pro Plus. This tool helps you easily evaluate a company’s intrinsic or fair value and its stock. Sign up for a free trial for Investing Pro Plus here

No Comments yet!

You’re in good hands

Elisabeth O. is an MBA graduate with a specialization in International Finance & Investments and over six years of financial writing experience. She is passionate about long-term investing to build wealth, avoids day trading and speculations, and loves a good Warren Buffet quote.