Special Reports

Intrinsic value reflects long-term look at a company

What’s the difference between “intrinsic value” and “market value”? – C.B., Opelika, Ala.

Imagine Meteorite Insurance (ticker: HEDSUP). Its intrinsic value is what it’s really worth, based on factors such as its assets and debt, its anticipated growth rate and, ultimately, the amount of cash it’s expected to generate during its lifetime.

Unfortunately, that’s not easy to determine, and different smart analysts will arrive at different numbers. Plus, things change. Meteorite’s intrinsic value might be estimated around $10 billion, but if a competitor gains a lot of ground with a new product, Meteorite’s future, and therefore its intrinsic value, is suddenly different. Meanwhile, market value is what investors are willing to pay for a company. It’s typically measured by calculating a company’s market capitalization: If Meteorite Insurance has 100 million shares outstanding and the current share price is $60, then its market cap is $6 billion (100 million times $60). If a firm’s estimated intrinsic value is higher than its market value, its stock likely is undervalued and attractive.

FOOLISH TRIVIA

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