How to Calculate Intrinsic Value: A Complete Guide

What Is Intrinsic Value?

Intrinsic value is the estimated “true” worth of a stock based on fundamental analysis, independent of its current market price. This concept is the cornerstone of value investing, first systematized by Benjamin Graham in The Intelligent Investor and later championed by Warren Buffett.

As Buffett has said: “Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: it is the discounted value of the cash that can be taken out of a business during its remaining life.”

Understanding intrinsic value matters because it helps investors:

• Identify undervalued stocks — when market price is below intrinsic value, there is a potential buying opportunity
• Avoid overvalued investments — prevent overpaying for popular stocks
• Build a margin of safety — buy at enough of a discount to buffer against errors in analysis
• Make rational decisions — invest based on data, not emotions

5 Methods to Calculate Intrinsic Value

There is no single “correct” way to calculate intrinsic value. Professional investors typically use multiple methods to cross-validate their estimates. Here is an overview of the five most widely used approaches:

Method 1: DCF Analysis (Most Popular)

Discounted Cash Flow (DCF) analysis is the most widely used valuation method among institutional investors and investment banks. The core idea is simple: a company is worth the sum of all its future free cash flows, discounted back to their present value.

The DCF Formula

The fundamental DCF intrinsic value formula:

Intrinsic Value = Sum of [FCFt / (1 + WACC)^t] + [Terminal Value / (1 + WACC)^n]

Where:
  FCFt           = Free Cash Flow in year t
  WACC           = Weighted Average Cost of Capital (discount rate)
  Terminal Value = FCFn x (1 + g) / (WACC - g)
  g              = Perpetual growth rate (typically 2-3%)
  n              = Projection period (typically 5-10 years)

Step-by-Step Example Using Apple (AAPL)

Here is a simplified DCF analysis using Apple's FY2025 data:

1. Determine base free cash flow: Apple's FY2025 free cash flow was approximately $111 billion
2. Estimate growth rate: Based on historical FCF CAGR, assume 8% annual growth for the next 5 years, tapering to a 3% terminal growth rate
3. Calculate WACC: Using the CAPM model, Apple's WACC is approximately 9.5% (based on Beta 1.2, risk-free rate 4.3%, equity risk premium 4.23%)
4. Project and discount cash flows: Discount each year's projected FCF to present value
5. Add terminal value: Calculate terminal value using the perpetuity growth method and discount it
6. Divide by shares outstanding: Get the per-share intrinsic value

Want to skip the manual math? Try our Apple DCF Calculator, which automates the entire process using real SEC financial data and market-derived WACC.

Method 2: Graham Number

The Graham Number is a simple formula created by Benjamin Graham (Buffett's mentor) for quickly estimating the maximum fair price of a stock. It is especially useful for screening defensive value stocks.

The Formula

Graham Number = sqrt(22.5 x EPS x BVPS)

Where:
  EPS    = Earnings Per Share (trailing 12 months)
  BVPS   = Book Value Per Share
  22.5   = Graham's ceiling (P/E of 15 x P/B of 1.5)

Example

Suppose a company has EPS of $5.00 and BVPS of $30.00:

Graham Number = sqrt(22.5 x 5.00 x 30.00)
             = sqrt(3,375)
             = $58.09

If the stock currently trades below $58.09, it may be undervalued. Graham recommended looking for stocks trading below their Graham Number for an extra margin of safety.

Look up any company's EPS and book value per share on our Company Analysis page.

Method 3: Relative Valuation

Relative valuation does not calculate an absolute intrinsic value. Instead, it compares a target company's valuation multiples (like P/E ratio) against industry peers to determine whether the stock is over- or undervalued.

How to Use P/E Multiples for Relative Valuation

1. Find the target company's EPS (Earnings Per Share)
2. Determine the sector median or peer average P/E ratio
3. Implied fair value = EPS x sector median P/E

For example, if a tech company has EPS of $8.00 and the sector median P/E is 25x:

Implied fair value = $8.00 x 25 = $200.00

If the stock trades at $160, it may be undervalued relative to peers. Check our Industry Valuation Benchmarks for median P/E, EV/EBITDA, and other multiples across all sectors.

Common Mistakes to Avoid

Frequently Asked Questions