What Is Intrinsic Value?
Intrinsic value is the price an investor would assign to a business, security, or other asset after analyzing what it is actually worth. Unlike market price, which is set by buyers and sellers trading at a given moment, intrinsic value is an estimate based on the asset's characteristics, such as its assets, earnings, and the cash it is expected to generate in the future. Because it depends on assumptions about the future, it is never known with certainty. It is always a judgment.
How Is It Estimated?
The most common approach is the discounted cash flow (DCF) method. An analyst projects the cash an asset will produce over a number of years, then converts those future amounts into today's dollars using a discount rate that reflects risk and the time value of money. The sum of these discounted amounts is the estimated intrinsic value.
A simplified version for a series of expected cash flows looks like this:
Intrinsic Value = Sum of (Cash Flow in Year t / (1 + Discount Rate)^t)
Other approaches include asset-based methods, which start from the value of what a company owns minus what it owes, and earnings-based methods, which apply a multiple to expected earnings per share. Different methods can produce different results, so analysts often compare several.
Why Does It Matter to Investors?
Value-oriented investors, including Benjamin Graham, who co-wrote the book Security Analysis, compare an estimate of intrinsic value with the market price. When the market price is well below the estimate, the asset may appear undervalued. When it is well above, the asset may appear overvalued. These comparisons are only as reliable as the assumptions behind them, and small changes in growth or discount rate assumptions can shift the result substantially.
Limitations
- Estimates rely on forecasts that may prove wrong.
- Results are sensitive to the chosen discount rate and growth assumptions.
- Intangible factors, such as brand strength or management quality, are difficult to quantify.
Updated October 15, 2026. For general education only; not financial, tax or legal advice.