What is intrinsic value?
Every day, millions of people buy and sell stocks based on the price they see on their screen. But very few ask a more important question — is that price actually fair?
Price vs intrinsic value
Price is what the market is willing to pay right now. It changes every second based on news, fear, greed, and what other investors think.
Intrinsic value is what the business is actually worth — based on the cash it generates, the assets it owns, and how it compares to similar businesses. It changes slowly, with earnings and growth.
The gap between these two numbers is where good investing decisions come from.
A simple way to think about it
Imagine your neighbour wants to sell their grocery shop. They are asking ₹50 lakh.
Before deciding whether to buy, you would want to know: How much profit does this shop make every year? Is that profit growing or shrinking? How much would you earn if you put ₹50 lakh in a fixed deposit instead?
If the shop earns ₹5 lakh per year and profits are growing — ₹50 lakh might be a fair price. If it earns ₹1 lakh and is losing customers — ₹50 lakh is too much.
You have just calculated intrinsic value without knowing it. Stocks work exactly the same way. Behind every ticker symbol is a real business with real earnings.
Why intrinsic value is not a single number
Different analysts will give you different intrinsic values for the same company. That is not a problem — it is the nature of the calculation. It depends on:
How fast you expect the company to grow — higher growth means more future earnings, which means higher intrinsic value today.
How risky the business is — a steady FMCG company is less risky than a new-age startup. Less risk means you can pay more today for the same future earnings.
Which method you use— DCF analysis, peer comparison, asset-based valuation all give different answers. Understock uses two methods and averages them — DCF analysis and peer comparison — to reduce the chance that one method's limitations distort the final answer.
What to do with intrinsic value
If the current price is significantly below intrinsic value — the stock may be undervalued. You are potentially buying ₹100 of value for ₹70.
If the current price is significantly above intrinsic value — the stock may be overvalued. You are paying ₹130 for ₹100 of value.
Neither is automatically a buy or sell signal. A stock can be undervalued for years before the market recognises it. An overvalued stock can keep going higher on momentum. But knowing intrinsic value gives you an anchor. Without it, you are guessing.
The most important thing to remember
Intrinsic value is an estimate, not a fact. The goal is not to find the exact right number. The goal is to know whether you are buying at a comfortable margin of safety — cheap enough that even if your estimate is a bit wrong, you still did not overpay.
See it in practice
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