The intrinsic value of a stock is the price estimate given to stocks by financial analysts. For this evaluation, many factors related to the business and investment are considered. The most important factors are profitability and earning quality. The intrinsic value of a stock is not equal to its market value. Fundamental analysis can be used to estimate the difference between intrinsic value and market value to make investment decisions. If a stock is trading below its intrinsic value, it is a buying opportunity (undervalued stock). On the other hand, if a stock is trading above its intrinsic value, it is advised to be sold (overvalued stock). Stock market bubbles are formed by increasing the difference between the market value and the intrinsic value of an overvalued stock.
There are a few methods to estimate the intrinsic value of the stocks. First, an Asset-Based Valuation where the present value of a company is used for estimation. Second, a Cash Flow Valuation method where cash flows are adjusted to identify the intrinsic value of the stock. Third, a Relative Valuation method where different ratios are used for value estimation. A few of these ratios are P/E (price to profit), P/B (price to book value), P/S (price to sale), and P/D (price to dividend).