Intrinsic value is an estimate of what a company is genuinely worth based on its fundamentals — its future cash flows, assets and earnings power — independent of its current market price. Value investors buy when market price falls well below intrinsic value. It is most commonly estimated with a discounted cash flow model.
Worked example
If a DCF estimates a company's intrinsic value at $120 per share and the stock trades at $80, a value investor sees a potential opportunity, subject to checking the assumptions behind the estimate.
Why it matters
Intrinsic value is the anchor of value investing: price is what you pay, value is what you get. Because it depends on forecasts, it is always a range, not a single exact figure.
Frequently asked questions
Most often by discounting projected future cash flows back to today, but it can also use earnings- or asset-based methods such as the Graham Number.