Intrinsic Value

Intrinsic Value

The concept of value is inherently subjective. What something is worth will change from person to person. Even the value of money can vary depending on your perspective. I like to use the following thought experiment to exemplify this, I call it the dumpster proposition. Imagine that you are walking past a dumpster that is emitting a horrible smell. Inside is a $5 bill. Would you climb inside to get the cash? What if it was $20? How about $1,000? Surely, most people would hold their nose for $10,000. Because every person’s threshold is different, we can see that not everyone values money the same way.

If a $20 bill can have different values to different people, then it’s easy to see how some other assets, like stocks or real estate, can also be subject to people’s perspectives. Investors like to make the distinction between intrinsic value and market value. Market value is what someone is willing to pay for something at any given time. Intrinsic value is a bit more complicated. Investors will point to some “objective” measure of an asset’s value. If we’re talking about a business or a stock it might be tied to its cash flow. How much is the business earning? But just because something has little intrinsic value today, does not mean it can’t in the future.

There are many stocks today that have tremendous intrinsic value that did not in years past. Amazon famously had no profits what-so-ever prior to the bubble in 2000, at least on paper anyway. (Don’t forget, the more profits you show the more taxes you pay.) From the perspective of investors in Amazon 20 years ago, the intrinsic value was yet to come. Fast forward to today and it is obvious that those early investors were right.

Today there are many names in the US stock market with no earnings. Airbnb went public in December of 2020 with no profits. Even names like Uber and Moderna, which have been on Wall Street for a few years, have yet to show any earnings. One perspective would be that the shares in theses companies have yet to realize their intrinsic value.

Market values are subject to quick changes. The entire stock market can and has lost 1/3 of its market value over just a few weeks. But can an investment’s intrinsic value change drastically overnight? That all depends on your perspective.


* This article is for informational purposes only and is not a recommendation to buy or sell stock of any of the companies listed.