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Intrinsic Value vs Market Value

Intrinsic Value vs Market Value [Ultimate Comparison]

The market valuation is a key estimator of a company’s worth. It is the calculation of the value of the assets of a company. And two most common ones are the Intrinsic Value and the Market Value of the company.

Intrinsic value vs market value is a hot debate. There are many differences between the two. This is what makes the two valuation methods interesting topics of our discussion.

You need to know the difference to make sound investment decisions. So, this article focuses on providing an ultimate comparison between the two valuation methods.

What Is Intrinsic Value?

We can define intrinsic value as a primary metric to evaluate a company’s worth. You can approximate the actual value of a company with this. And this amount will not depend on the market value of the company.

Intrinsic value definition can be summarized as the fundamental analysis of the company. When you calculate intrinsic value, you consider both tangible and intangible parameters. It can include financial statements, market analysis, and the company’s business plan. That makes calculating the intrinsic value of a company a challenging task.

According to many scholars, intrinsic value is something that brings cash flow for investors. This involves stock dividends, lease payments, and others. Thus, the intrinsic value gives a true valuation of the assets.

The intrinsic value determines the true underlying value of a company. This value is different from the market value. The formulas determine the worth of the assets instead of considering the current prices only.

There can also be debates between intrinsic value vs book value. Many consider the two to be quite similar. Well, they are easy to get confused about. The book value of a company is the present valuation of the assets only. At the same time, the intrinsic value is the present estimation of the future asset value of a company.

What Is Market Value?

The term, Market Value, is almost self-explanatory. It is the prices buyers and investors are willing to pay for a firm’s assets. For example, a company’s market value is the amount investors are willing to pay for the shares of the company.

The market value can significantly differ from the intrinsic value. The difference between intrinsic value vs market price can be higher or lower. This value represents the current market capitalization of the company.

So, this value is only the present share price of the company. It means that the market value is not the true evaluation of a company. The company’s actual worth can be a lot different than what the market value shows.

The market value will be higher than the intrinsic value when there is strong investment demand. This overvalues the company’s actual worth. On the other hand, not enough demand will make the market value less than the intrinsic value. This means that the company has been undervalued.

We can also consider market value as how much the public values the company. It depends on the demand and supply of the company in the market. And also, it determines the investor’s interest in the company.

Intrinsic Value vs Market Value: 3 Key Differences

By now, we know the primary difference in the definitions of the two. But our goal is to understand the dissimilarities better. So, here is market value vs intrinsic value with 3 key differences between the two.

The Calculation

Both the valuation methods have different formulas for calculation. It solely depends on the way investors look at the assets. Let’s have a detailed discussion about it.

3 Ways to Calculate the Intrinsic Value

There are quite a few intrinsic value formulas out there. The calculation method defers from one analyst to another. Here are 3 ways to calculate intrinsic value.

Discounted Cash Flow Analysis (DCF)

A DCF is looking into the cash flow of the company to calculate the intrinsic value. It involves 3 simple steps.

The first step is to estimate the future cash flows. You can use the Weighted Average Cost of Capital (WACC) to calculate the amount. Once you figure it out, you will need to calculate the present value of the future cash flow.

And then comes the final step, where you analyze the calculated present value. Thus, you obtain the intrinsic value of the company from the cash flows.

Asset-based Valuation

This is a straightforward method to calculate intrinsic value. You can calculate the intrinsic value of stocks by using this method. The simplest formula is as follows:

Intrinsic Value = Company Assets – Company Liabilities

Financial Metric Analysis

Financial metrics like the price-to-earnings (P/E) ratio can also be used to calculate the intrinsic value. Here is the complete formula:

Intrinsic Value = Earnings Per Share (EPS) x (1 + r) x P/E Ratio

Here, “r” is the expected earnings growth rate of the stock.

Ways to Calculate the Market Value

Compared to the intrinsic value, market value is relatively easier to calculate. If the company is listed in a public share, you can just look at the current price to determine the market value. But there is a formula to determine the market capture of the company.

The formula is not complicated either. You can just calculate the market value by multiplying the Total Numbers of Outstanding Shares with the Current Stock Price.

The stock price can increase in particular circumstances. Companies can buy their own stocks through buybacks. This reduces the total number of shares available in the market. As a result, you will notice an increase in the stock price.

The Significance of the Two

The two valuation processes have a difference in their significance as well. Let’s begin with the market value.

Market value doesn’t reflect the true value of the company. For example, the market value of a house is not the true value of the property. The reason is quite simple. Market value takes the demand and supply of the asset into account.

If the intrinsic value of a stock is greater than its market value, there is weak demand in the market. This means that the company may not be that worthy in the current situation. This is where intrinsic value shows its significance.

The intrinsic value of the company takes the future cash flow estimation into account. Thus, you can generate a current true value of the company. The market value only depicts the current performance of the company in the market.

Strategies for Investors

There can be two types of investors in our discussion here. One of them is the Value investors. And the other group is the Momentum Investors.

The value investors consider the intrinsic value of a company. They don’t focus on short-term market fluctuations. Instead, their target is to use the volatile market to enhance the company portfolio. This enables them to invest in stocks that have profit potentials.

And the momentum investors focus more on the market value of a company. They concentrate on the current price charts. They also check different technical indicators to invest in the most valuable current stock. Thus, they try to make a profit on the short-term market changes.   

Frequently Asked Questions

What If Intrinsic Value is Higher Than Market Price?

The intrinsic value being higher than the market price indicates an undervaluation of the stock. Thus, an investor will buy the stock in expectation of potential profit.

Is Intrinsic Value the Same as Fair Value?

Intrinsic value and fair value are two different concepts. Intrinsic value is the actual value of company assets, but the fair value is the probable market price of the assets.

What are Intrinsic Value Market Value and Book Value?

Intrinsic value is the future estimation of the current assets of a company. Book value is the current valuation of the assets, and the market value is simply the company’s current stock price in public shares.

How do You Calculate Intrinsic Value?

You can calculate the intrinsic value in as many as 3 ways. These are:

1. Discounted Cash Flow Analysis (DCF)

2. Asset-based valuation

3. Financial metric analysis

What Is An Intrinsic Value Example?

Intrinsic value is the difference between the underlying stock price and strike price. Suppose an asset has a strike price of $20 and an underlying stock price of $30. So, the intrinsic value of the asset is $10.

Is High Intrinsic Value Good?

The intrinsic value determines the true value of a company. A high intrinsic value means that it is profitable to invest in the company. Thus, it would be best to look for higher intrinsic value companies for the best investment decisions.

Conclusion

The intrinsic value vs market value differences is the key to making strategical investments. Both valuation methods are the areas of financial analysts. But investors can easily look into the two ways and make profitable investments.

The primary difference lies in the valuation purpose. Intrinsic value focuses more on the actual value of a company. It takes future estimations into account to determine present value. This way, anyone can determine which stocks have the best potential.

Market value is focused more on taking the current price into account. It depends on the present demand and supply of the company.

Yet, no particular method can be considered as the ideal one. It’s the job of the analyst and investors to pick the best-suited one for their purposes.

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