What Is Fair Value of a Stock? A Plain-English Guide

The idea in one paragraph

A company is worth the cash it will hand to its owners over its lifetime, expressed in today's money. If you could predict that cash exactly, you would know what the shares should cost. You cannot, so analysts build an estimate and attach a range. That estimate is the fair value. The market price is what people pay today; fair value is what the numbers suggest the business is worth. The distance between the two is the gap.

How ATLAS calculates it

ATLAS runs two valuations and combines them. The first is a discounted cash flow (DCF): it projects free cash flow for ten years and discounts it back to today with a rate that reflects the risk of the business. The second is a peer comparison: it applies the median P/E and EV/EBITDA of similar listed companies to the company's own earnings. When both work, the fair value is their geometric mean; when only one works, ATLAS uses it and lowers the confidence.

The full list of inputs, limits and what happens when the two methods disagree is on the methodology page. Everything uses stated assumptions, and for US companies the financial data comes from SEC filings.

How to read the range and the confidence level

• The mid-point is the central estimate.
• The range comes from recalculating with a higher and a lower discount rate and with lower and higher starting growth. A wide range means the answer depends heavily on assumptions.
• The confidence level (low, medium, high) comes from a 0 to 100 score built from cash-flow stability, agreement between the two methods, peer quality, range width, closeness to the price and data quality.
• The label says "below fair value" when the price is at least 15% under the mid-point, "above fair value" when it is at least 15% over, "close to fair value" in between.

Fair value versus price target versus intrinsic value

• Price target: what an analyst expects the price to be in 12 months. It is a forecast of the market. Fair value is not.
• Intrinsic value: the same idea as fair value in academic writing; the two terms are used almost interchangeably. See the intrinsic value glossary entry.
• Book value: an accounting figure from the balance sheet. It can be far from what the business is worth.

Why two reasonable people get different numbers

Fair value depends on growth, margins and the discount rate. Change the growth by a few points and the answer can move a lot. This is why ATLAS shows a range and why you should treat the figure as a starting point for questions, not as an answer. A company that is 20% below its mid-point but with low confidence deserves more caution than one 10% below with high confidence.

Limits you should know

• Free cash flow is used as reported, so companies that pay staff in shares can look cheaper than they are.
• Banks and insurers are valued only with earnings multiples, because cash flow means something different for them.
• Loss-making companies may not have a usable fair value at all.
• The market can be right and the model wrong. Fair value is a tool for comparing, not a promise.