Account Info
Log Out

Fundamental Analysis

Views 8084Oct 31, 2023

Why does intrinsic value and market price differ for stocks?

In the world of investment, investors are constantly looking at companies that are undervalued or overvalued compared to their intrinsic value so that we can harvest the difference between market value and intrinsic value. That may sound easy, but it's often hard to achieve in real life, considering Intrinsic value is an estimate of the true value of a company.

Market Value, on the other hand, often refers to market capitalization, which is simply the multiple of outstanding shares and the share price. Most of the time, market value is significantly different from the intrinsic value, which drives the market to move constantly.

Intrinsic Value

Intrinsic value is a core metric used by value investors to determine if a company is worth investing in. A value investor would either invest in stocks that have a market value that is lower than its intrinsic value, or short stocks that have a market value that is higher than its intrinsic value.

Intrinsic value is difficult to determine since it's a complex of a company's both tangible and intangible assets, which includes financial performance, market sentiment, economic moat, business strategy, etc. It's extremely difficult to define a certain price of these factors for both individual investors and professionals. It's very common for different investment firm provides different price expectations for a company.

There are multiple ways to define intrinsic value. One of the most common is estimating by the Discounted Cash Flow model. The intrinsic value of a company is the present value of the future free cash flows of the company in DCF calculation. However, this method only measures financial performance and is limited by model risk.

Market Value

Market value is the company's value calculated by multiplying its current share price and outstanding shares amount. It rarely reflects the actual value of the company. Since the market value of a company is highly correlated to the market sentiment about a company, the share price of a company could be pushed by a market frenzy to any price. The perfect example is the meme stocks that are favored by WSB investors in 2021.

The market value is normally higher than the intrinsic value of the company if there is strong investment demand, which could cause a possible overvaluation. The opposite is true if there is weak investment demand, which can lead to the undervaluation of the company.

Source: Investopedia

This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal. Moomoo makes no representation or warranty as to its adequacy, completeness, accuracy or timeline for any particular purpose of the above content.

Moomoo is a financial information and trading app offered by Moomoo Technologies Inc.

In the U.S., investment products and services available through the moomoo app are offered by Moomoo Financial Inc., a broker-dealer registered with the U.S. Securities and Exchange Commission (SEC) and a member of Financial Industry Regulatory Authority (FINRA)/Securities Investor Protection Corporation (SIPC).

In Singapore, investment products and services available through the moomoo app are offered through Moomoo Financial Singapore Pte. Ltd. regulated by the Monetary Authority of Singapore (MAS). Moomoo Financial Singapore Pte. Ltd. is a Capital Markets Services Licence (License No. CMS101000) holder with the Exempt Financial Adviser Status. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Australia, financial products and services available through the moomoo app are provided by Futu Securities (Australia) Ltd, an Australian Financial Services Licensee (AFSL No. 224663) regulated by the Australian Securities and Investment Commission (ASIC). Please read and understand our Financial Services Guide, Terms and Conditions, Privacy Policy and other disclosure documents which are available on our website  https://www.moomoo.com/au .

In Canada, order-execution only services available through the moomoo app are provided by Moomoo Financial Canada Inc., regulated by the Canadian Investment Regulatory Organization (CIRO).

In Malaysia, investment products and services available through the moomoo app are offered through Futu Malaysia Sdn. Bhd. ("Moomoo MY")regulated by the Securities Commission of Malaysia (SC). Futu Malaysia Sdn. Bhd. is a Capital Markets Services Licence (License No. eCMSL/A0397/2024) holder. This advertisement has not been reviewed by the SC.

Moomoo Technologies Inc., Moomoo Financial Inc., Moomoo Financial Singapore Pte. Ltd.,Futu Securities (Australia) Ltd, Moomoo Financial Canada Inc., and Futu Malaysia Sdn. Bhd. are affiliated companies.

Recommended