What is intrinsic value?
Intrinsic value is an estimate of what a business is actually worth, based on its own fundamentals and independent of the stock price. Price is what the market charges today; intrinsic value is what the business is worth. The whole of value investing lives in the gap between the two.
New to the approach? Start with the value investing basics.
Price is what you pay, value is what you get
A stock quote moves every second, pushed around by news, mood, and the crowd. The business underneath it does not change nearly that fast. Intrinsic value is a deliberately slow number, an estimate of what the company is worth from the cash it generates and the assets it owns, so it gives you a fixed point to judge the quote against.
When price sits well below intrinsic value, a share is on sale. When it sits well above, the market is paying for optimism. Neither is an instruction to act; both are context for a decision that stays yours.
How intrinsic value is estimated
Nothing about it is guesswork or gut feel. Every input comes from the company's published financial statements. Three complementary methods each open a different door into the same house:
- Cash-flow (DCF). A discounted cash flow on owner earnings, the cash the business actually throws off. Project it forward about a decade at a conservative rate, discount each year back to today, and add a terminal value for the years beyond.
- Earnings-based. Grow current earnings per share forward, apply a reasonable future price-to-earnings multiple, and discount that price back to today.
- Asset-based. Start from book value, what shareholders own outright after debts are paid.
The methods differ on purpose. When independent estimates land close together, you can trust the range; when they diverge, that disagreement is itself information worth investigating. Four public calculators valued the same company on the same day at $163 to $319, and why intrinsic value calculators disagree explains where that gap comes from. You can work through the cash-flow and earnings methods yourself with the intrinsic value calculator.
Why it's an estimate, and why that's fine
Intrinsic value depends on assumptions about future growth and the return you require, so no one can hand you a single exact figure and be right. That is exactly why the margin of safety matters: buy at a steep discount, often half, of your conservative estimate, and even a flawed number leaves room to be wrong. A valuation you can inspect and adjust is worth more than one presented as certainty.
A worked example: ADP
All figures below come from Automatic Data Processing's FY2025 annual filing, the year ended June 30, 2025. Payroll processing is about as steady as a business gets, which is exactly the kind of company this method suits.
Start with owner earnings, the cash left over after paying to keep the business running. Operating cash flow was $4.94 billion. Capital spending took $169 million. That leaves $4.77 billion, or $11.67 per share across 409 million diluted shares.
Now project it forward. Assume owner earnings grow 8% a year for ten years. Discount each year back to today at 15%, the yearly return you require for taking the risk. Add a terminal value of 15 times the tenth year, discounted the same way. The total comes to about $177 a share.
Then change one assumption and watch what happens. At 6% growth the estimate is $154. At 8% it is $177. At 10% it is $204. Same company, same filing, same discount rate. A four-point swing in one guess moves the answer by about $50 a share.
That is the whole lesson. Intrinsic value is not a fact you can look up. It inherits every assumption you feed it, which is why two careful people reading the same annual report reach different numbers and both can be reasonable. It is also why the margin of safety exists. Buy far enough below your own estimate and you can be wrong about growth and still be fine.
Frequently asked questions
What is intrinsic value?
Intrinsic value is an estimate of what a business is actually worth based on its own fundamentals: its earnings, its cash flow, and its assets. It ignores what the stock is quoted at today. Price is what the market charges. Intrinsic value is what the business is worth. Value investing is the practice of buying when price sits well below intrinsic value. A simple way to feel the difference: if a corner store earns $50,000 a year and you would pay six times that to own it outright, the store is worth about $300,000 to you no matter what a neighbour offers this week. The same logic scales to a public company. The catch is that intrinsic value is never observable. You cannot look it up anywhere. You estimate it, and two careful investors can reach different numbers from the same set of filings.
How do you calculate intrinsic value?
The most common method is a discounted cash flow, or DCF, on owner earnings. You project the cash the business generates forward about ten years at a conservative growth rate. You discount each year back to today at the minimum annual return you require. Then you add a discounted terminal value for the years beyond. A quick sense of the math: $100 arriving in ten years is worth about $25 today at a 15% required return, so distant cash counts for far less than near cash. An earnings-based estimate and an asset-based estimate give complementary angles on the same business. Every input traces to the company's published financials, not to market sentiment. The method breaks down when cash flow is negative or wildly erratic, which is why it suits stable, profitable companies and struggles with early-stage ones.
What is the difference between intrinsic value and market price?
Market price is what a share trades at right now. It is set by supply, demand, and sentiment, and it moves every second the market is open. Intrinsic value is a slower estimate of what the business is worth, built from fundamentals, and it barely moves day to day. A company's value does not change by 3% because a headline appeared, but its price certainly can. A stock that swings between $80 and $140 inside one year did not become a 75% better business at the top of that range. The gap between the two is the whole opportunity. Buy when price sits well below value. Ignore the quote when it does not. Over short periods the two can diverge for years, which is uncomfortable and is exactly why most people abandon the approach. Over long periods they tend to converge, because a business that keeps earning cash eventually gets priced for it.
What is the difference between intrinsic value and fair value?
They are closely related, but they are not the same number and they are worked out differently. Intrinsic value usually refers to the cash-flow view: what the business is worth from the owner earnings it generates, discounted back to today. Fair value usually refers to the earnings-based view: grow earnings per share forward, apply a reasonable multiple to what the company earns by then, and discount that future price back. One road starts with cash. The other starts with earnings. Both estimate what a company is worth from its own fundamentals rather than from its quote. When two independent methods land in a similar range, the estimate is more trustworthy. When they land far apart, that gap is information too. It usually means earnings and cash flow are telling different stories, which is worth understanding before you act.
Can you know a company's intrinsic value exactly?
No, and that is the point. Intrinsic value is an estimate built on assumptions about future growth and the return you require, so reasonable people arrive at different numbers from identical filings. Change an assumed growth rate from 8% to 10% and the estimate can move by 20% or more. That sensitivity is not a flaw in the method. It is an honest description of how uncertain the future really is. This is why a margin of safety matters. Buying at a steep discount to your estimate, often half of it, leaves room for the estimate to be wrong and for the purchase to still work out. Treat any single number presented as a precise valuation with suspicion. A valuation you can inspect, argue with, and adjust is worth far more than a confident figure with its assumptions hidden.
Intrinsic value, worked out for you
Wonderfolio works out fair value and intrinsic value for every company, then three buy prices with a margin of safety built in. It shows the inputs behind each one. On iPhone, iPad, and Mac. You bring the judgment.
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Wonderfolio is an educational research tool. It applies publicly known value-investing concepts to public data. Nothing on this page or in the app is personalized investment advice or a recommendation to buy or sell any security.