Estimate the intrinsic value of a stock and compare it to its current market price.
Annual earnings attributable to each outstanding share of common stock.
The projected annual percentage increase in EPS.
The minimum return an investor expects to earn.
The constant growth rate expected indefinitely after the initial growth period.
Number of years for explicit, non-constant growth projections.
The stock's current trading price in the market.
Estimated Fair Value
$ –
Estimated Intrinsic Value Range
N/A
Price/Fair Value Ratio
N/A
Investment Recommendation
Enter values to get started.
Formula Used: Discounted Cash Flow (DCF) Model (specifically, a two-stage model). Future earnings are projected, discounted back to present value, and then a terminal value is calculated and discounted. The sum of these present values estimates the stock's intrinsic fair value.
Projected Future EPS (Illustrative)
Year
Projected EPS
Discount Factor (at Required Rate)
Present Value of EPS
What is a Stock Fair Value Calculator?
A stock fair value calculator is a financial tool designed to estimate the intrinsic worth of a company's stock. It helps investors move beyond the current market price to understand what a stock *should* be worth based on its fundamental financial health and future prospects. This process, often referred to as fundamental analysis, involves assessing a company's earnings, growth potential, assets, liabilities, and other key metrics.
The primary goal is to identify stocks that are potentially undervalued (trading below their calculated fair value) or overvalued (trading above their calculated fair value). By understanding this intrinsic value, investors can make more informed decisions about buying, selling, or holding a particular stock, aiming to maximize returns and minimize risk. This calculator utilizes a common valuation method, the Discounted Cash Flow (DCF) model, to provide an estimate.
Who Should Use It?
Long-Term Investors: Those looking to buy and hold stocks for years will benefit from understanding a stock's fundamental value.
Value Investors: Investors who actively seek out undervalued assets often rely on fair value calculations.
Fundamental Analysts: Professionals and serious hobbyists who perform in-depth analysis of companies.
New Investors: To gain a deeper understanding of stock valuation beyond just market price.
Common Misconceptions
It's a Precise Number: Fair value is an *estimate*. Different models and assumptions yield different results. This calculator provides one perspective.
Market Price Always Moves to Fair Value: While often the case in the long run, market prices can deviate significantly from fair value for extended periods due to market sentiment, news, or economic factors.
Guaranteed Profits: Buying an undervalued stock doesn't guarantee profit. The company's future performance must still align with assumptions.
Stock Fair Value Calculator Formula and Mathematical Explanation
This stock fair value calculator employs a Discounted Cash Flow (DCF) model, specifically a two-stage variant. This method projects a company's future cash flows (represented here by Earnings Per Share, EPS) and then discounts them back to their present value using a required rate of return. It accounts for an initial period of expected growth followed by a stable, perpetual growth phase.
Step-by-Step Derivation
Project Future EPS: For the initial `n` years (Projection Years), EPS is grown at the `Expected Growth Rate`.
EPS_t = EPS_(t-1) * (1 + Expected Growth Rate)
Calculate Discount Factor: For each year, calculate the factor by which future cash flows need to be discounted to find their present value.
Discount Factor_t = 1 / (1 + Required Rate of Return)^t (where 't' is the year number)
Calculate Present Value of Projected EPS: Multiply the projected EPS for each year by its corresponding discount factor.
PV of EPS_t = EPS_t * Discount Factor_t
Calculate Terminal Value: After the explicit projection period, estimate the value of all future cash flows assuming a constant growth rate (`Terminal Growth Rate`). The Gordon Growth Model is often used here:
Terminal Value = (EPS_n * (1 + Terminal Growth Rate)) / (Required Rate of Return – Terminal Growth Rate)
(Note: This terminal value is typically based on the earnings of the last explicit forecast year, `n`, but growing into perpetuity.)
Discount Terminal Value: The calculated Terminal Value represents a value at the end of year `n`. It must also be discounted back to the present.
PV of Terminal Value = Terminal Value / (1 + Required Rate of Return)^n
Sum Present Values: The total estimated fair value is the sum of the present values of all projected EPS amounts for the explicit period PLUS the present value of the terminal value.
Fair Value = Σ (PV of EPS_t) from t=1 to n + PV of Terminal Value
Calculate Intrinsic Value Range: To provide a more realistic view, we calculate a range by slightly adjusting the Required Rate of Return (e.g., +/- 1-2%).
Calculate Price/Fair Value Ratio: Divide the Current Market Price by the Estimated Fair Value to see how the market currently values the stock relative to its estimated intrinsic worth.
Variable Explanations
DCF Model Variables
Variable
Meaning
Unit
Typical Range
Earnings Per Share (EPS)
A company's profit allocated to each outstanding share of common stock. Foundation for cash flow projection.
Currency ($)
Positive values, company-specific
Expected Growth Rate
The projected annual increase in EPS during the explicit forecast period. Reflects expected business expansion, profitability improvements.
%
0% – 25% (Higher for early-stage, lower for mature)
Required Rate of Return
The minimum annual return an investor expects from an investment, considering its risk.
%
5% – 20% (Higher risk stocks demand higher rates)
Terminal Growth Rate
The perpetual, constant annual growth rate of EPS expected indefinitely after the explicit forecast period. Should be conservative, usually near or below long-term economic growth.
%
2% – 5%
Projection Years
The number of years for which EPS growth is explicitly forecasted before assuming a constant terminal growth rate.
Years
3 – 10 years
Current Market Price
The prevailing price at which the stock is currently trading on the exchange.
Currency ($)
Positive values, market-driven
Practical Examples (Real-World Use Cases)
Example 1: Tech Growth Stock
Company Profile: A rapidly growing software company with innovative products and increasing market share.
Inputs:
EPS: $2.50
Expected Growth Rate: 20.0%
Required Rate of Return: 15.0%
Terminal Growth Rate: 4.0%
Projection Years: 5
Current Market Price: $50.00
Calculation Summary: The calculator projects EPS growth at 20% for 5 years, then assumes 4% perpetual growth. Each year's projected EPS and the final terminal value are discounted at 15%.
Outputs:
Estimated Fair Value: $45.75
Estimated Intrinsic Value Range: $40.10 – $51.40
Price/Fair Value Ratio: 1.09x
Investment Recommendation: Overvalued
Interpretation: Even with high growth assumptions, the stock's current market price ($50.00) is significantly higher than its estimated fair value ($45.75). The Price/Fair Value ratio is above 1, suggesting it might be overvalued based on these projections. Investors might wait for a better entry point or re-evaluate growth expectations.
Example 2: Mature Dividend Stock
Company Profile: A stable utility company with consistent earnings and a history of paying dividends.
Inputs:
EPS: $8.00
Expected Growth Rate: 5.0%
Required Rate of Return: 10.0%
Terminal Growth Rate: 3.0%
Projection Years: 5
Current Market Price: $70.00
Calculation Summary: EPS grows at a moderate 5% for 5 years, then settles into a 3% perpetual growth rate. Cash flows are discounted at 10%.
Outputs:
Estimated Fair Value: $92.50
Estimated Intrinsic Value Range: $82.00 – $103.00
Price/Fair Value Ratio: 0.76x
Investment Recommendation: Undervalued
Interpretation: The stock's current market price ($70.00) is well below its estimated fair value ($92.50). The Price/Fair Value ratio is less than 1, indicating potential undervaluation. This suggests the stock might be a good buying opportunity for investors seeking long-term value, provided the company's fundamentals remain strong.
How to Use This Stock Fair Value Calculator
Using this stock fair value calculator is straightforward but requires careful consideration of input assumptions.
Gather Financial Data: Obtain the company's latest Earnings Per Share (EPS) from its financial reports (e.g., annual 10-K or quarterly 10-Q filings).
Estimate Growth Rates:
Expected Growth Rate: Research the company's historical growth and analyst estimates for its near-term future. Consider its industry, competitive landscape, and product pipeline. Be realistic; overly optimistic rates inflate fair value.
Terminal Growth Rate: This should be a conservative, long-term rate, often reflecting the expected growth of the overall economy (e.g., 2-4%). A rate higher than the required rate of return will lead to an infinite, nonsensical result.
Determine Required Rate of Return: This is your personal target return, considering the riskiness of the stock and the opportunity cost of investing elsewhere (e.g., bonds, other stocks). A higher risk typically demands a higher rate.
Set Projection Years: Choose the number of years for explicit, detailed forecasting. 5 years is common, but this can vary based on the company's predictability.
Input Current Market Price: Enter the stock's current trading price.
Click 'Calculate Fair Value': The calculator will process the inputs and display the estimated fair value, an intrinsic value range, the Price/Fair Value ratio, and a recommendation.
Interpret the Results:
Fair Value: The estimated intrinsic worth per share.
Intrinsic Value Range: Provides a more nuanced view by showing potential values with slight variations in your required return.
Price/Fair Value Ratio: A ratio below 1 suggests undervaluation; above 1 suggests overvaluation.
Recommendation: A general guide based on the ratio (Undervalued, Fairly Valued, Overvalued).
Make Decisions: Use these insights alongside other forms of analysis (qualitative factors, industry trends, management quality) to inform your investment strategy.
Key Factors That Affect Stock Fair Value Results
Several critical factors significantly influence the output of any stock fair value calculator, particularly DCF models. Understanding these is key to interpreting the results:
Earnings Per Share (EPS) Accuracy: The starting point for most DCF models. Inaccurate or manipulated EPS figures will lead to flawed valuations. Investors should look at "quality of earnings."
Growth Rate Assumptions: This is arguably the most sensitive input. Small changes in expected or terminal growth rates can drastically alter the calculated fair value. Overestimating growth is a common pitfall.
Required Rate of Return: Reflects risk and opportunity cost. A higher required rate (due to perceived risk or higher alternative returns) will lower the present value of future earnings, thus decreasing the calculated fair value. Conversely, a lower required rate increases fair value.
Terminal Growth Rate Conservatism: The terminal growth rate assumes the company grows indefinitely. This rate should be conservative, typically aligned with long-term economic growth expectations. An unrealistically high terminal rate creates a disproportionately large terminal value, inflating the fair value estimate.
Discounting Consistency: Ensuring the discount rate (required rate of return) is applied consistently across all projected cash flows and the terminal value is crucial. Mismatched rates or incorrect application lead to calculation errors.
Future Uncertainty and Risk: The DCF model is inherently based on future projections, which are uncertain. Factors like economic downturns, competitive threats, regulatory changes, technological disruption, or management missteps can significantly impact a company's actual future performance, diverging from projections.
Capital Structure and Debt: While this simplified model uses EPS, more complex DCF analyses use Free Cash Flow (FCF), which is affected by capital expenditures and changes in working capital. A company's debt levels also influence its risk profile and thus its required rate of return.
Inflation and Interest Rates: Broader economic factors like inflation and prevailing interest rates influence both a company's ability to grow earnings and the appropriate discount rate to use. Rising interest rates generally lead to higher discount rates and lower valuations.
Frequently Asked Questions (FAQ)
What is the difference between fair value and market price?
Market price is the current price at which a stock is trading on an exchange, determined by supply and demand. Fair value is an estimate of a stock's intrinsic worth based on its fundamental financial performance and future prospects, typically calculated using valuation models like DCF.
Can a stock's fair value change over time?
Absolutely. A stock's fair value is dynamic and changes as the company's financial performance, growth prospects, industry conditions, and overall economic factors evolve. Regular recalculation is essential.
Is a Price/Fair Value ratio of 1.0 considered a good investment?
A ratio of 1.0 suggests the market price is equal to the estimated fair value. For value investors, this might mean the stock is "fairly valued" but not necessarily a bargain. Opportunities often lie with ratios significantly below 1.0.
Why is the Terminal Growth Rate capped at the Required Rate of Return?
If the terminal growth rate were higher than the required rate of return, the Gordon Growth Model would produce an infinite (or nonsensical) value, implying the company would grow faster than the economy indefinitely. A conservative rate, usually not exceeding long-term economic growth, is essential.
How reliable is the DCF model for fair value calculation?
The DCF model is a widely respected valuation method, but its reliability hinges heavily on the accuracy of its assumptions (growth rates, discount rates). It's considered a strong tool when used thoughtfully but is not infallible. It's best used in conjunction with other valuation methods.
What if a company has negative EPS?
If a company has negative EPS, a standard DCF model based on earnings is difficult to apply directly. Investors might look at alternative valuation metrics (e.g., Price-to-Sales, Price-to-Book) or analyze the company's cash flow projections and turnaround potential if it's a growth or turnaround situation.
Can I use this calculator for any type of stock?
This calculator, based on a DCF model using EPS, is best suited for profitable, mature companies with predictable earnings and growth patterns. It may be less reliable for startups, cyclical companies, or those with highly erratic earnings.
What does the "Intrinsic Value Range" signify?
The range (e.g., $82-$103) shows how the estimated fair value changes if your required rate of return fluctuates slightly (e.g., +/- 1% or 2%). It highlights the sensitivity of the valuation to this key assumption and provides a more robust assessment than a single point estimate.