Intrinsic Value of Share and Stock: A Complete Guide for Investors

The Intrinsic Value of Share or Intrinsic Value of Stock represents the true worth of a company’s share, independent of its current market price or market sentiment. Unlike speculative price movements, the intrinsic value is based on an in-depth analysis of the company’s financial health, assets, growth potential, and future cash flows.

This makes it one of the most important concepts for long-term investors, especially those who follow value investing strategies.

What is the Intrinsic Value of Stock?

The Intrinsic Value of Stock is essentially the present value of all the future cash flows or dividends a company is expected to generate, discounted to today’s value. It gives investors a clear picture of whether a stock is undervalued or overvalued compared to its market price.

• If Intrinsic Value > Market Price, the stock is undervalued → potential buying opportunity.
  
  

• If Intrinsic Value < Market Price, the stock is overvalued → may be a signal to sell or avoid.
  
  

How to Calculate Intrinsic Value of Share

There is no single universal formula, but analysts generally use two popular models to estimate the Intrinsic Value of Share and Stock:

1. Discounted Cash Flow (DCF) Model

The DCF model calculates the intrinsic value by estimating future Free Cash Flows (FCF) and discounting them back to their present value.

Formula:

[
Intrinsic\ Value = \sum_{t=1}^{n} \frac{CF_t}{(1+r)^t} + \frac{Terminal\ Value}{(1+r)^n}
]

Where:

• CFt = Free Cash Flow in year t
  
  

• r = Discount Rate (usually WACC – Weighted Average Cost of Capital)
  
  

• n = Projection period (5–10 years)
  
  

• Terminal Value (TV) = Value of cash flows beyond projection years
  
  

Steps:

1. Forecast Free Cash Flows for 5–10 years.

2. Determine discount rate (WACC or required return).

3. Calculate terminal value using growth assumptions.

4. Discount all values to present value.

5. Divide by the total number of shares → Intrinsic Value per Share.
   
   

2. Dividend Discount Model (DDM)

Best suited for companies with consistent dividend payouts, this model estimates value based on expected future dividends.

Formula (Gordon Growth Model):

[
Intrinsic\ Value = \frac{D_1}{r - g}
]

Where:

• D1 = Expected dividend next year

• r = Required rate of return

• g = Dividend growth rate
  
  

3. Simplified Multiples Method

For a quick estimate, analysts also use valuation multiples such as:

[
Intrinsic\ Value \approx (Industry\ Average\ P/E) \times (Company's\ EPS)
]

This method is less precise but useful for a rough comparison.

Intrinsic Value of Share in Value Investing

The concept of Intrinsic Value of Stock is central to value investing, a philosophy pioneered by Benjamin Graham and practiced by Warren Buffett.

Role in Value Investing:

• Spotting Undervalued Stocks: Investors buy when intrinsic value is higher than market price.

• Margin of Safety: By purchasing shares significantly below intrinsic value (e.g., stock worth ₹100 available at ₹60), investors reduce risks.

• Focus on Fundamentals: Intrinsic value helps investors ignore market noise, speculation, and short-term volatility.

Why Investors Should Care

Understanding the Intrinsic Value of Share and Stock helps investors:

• Make rational, data-backed investment decisions.

• Avoid overpaying for overpriced shares.

• Identify hidden opportunities in undervalued companies.

• Build a strong, long-term portfolio based on fundamentals.
  
  

 Conclusion:
The Intrinsic Value of Share is not just a number—it’s the foundation of smart investing. By using models like DCF and DDM, investors can uncover the real worth of a stock, filter out market noise, and follow disciplined investment strategies. For anyone serious about value investing, mastering intrinsic value is a must.