To The Moon

I have mentioned in some of my articles and comments that I used strong free cash flow and intrinsic value of a stock to determine if this stock is worth investing for long term or short term.

Here is a simple summary of what I have used them for

1. Strong Free Cash Flow + Below Intrinsic Value - this stock can be bought and hold for long term, another way to use it is to hold these stocks for recession-proof.

2. Strong Free Cash Flow + Above Intrinsic Value - this stock can be bought for short term trade and profit.

Based on definition from https://www.investopedia.com/terms/i/intrinsicvalue.asp

What Is Intrinsic Value?

Intrinsic value is a measure of what an asset is worth.

This measure is arrived at by means of an objective calculation or complex financial model. Intrinsic value is different from the current market price of an asset.

However, comparing it to that current price can give investors an idea of whether the asset is undervalued or overvalued.

Financial analysis uses cash flow to determine the intrinsic, or underlying, value of a company or stock.

In options pricing, intrinsic value is the difference between the strike price of the option and the current market price of the underlying asset.

Here are something we need to take note if we wanted to use intrinsic value.

• There are various ways to calculate intrinsic, or true, value.

• Discounted cash flow analysis is used for many intrinsic value calculations.

• Intrinsic value is a core concept that value investors use to uncover hidden investment opportunities.

• When an asset's market price is below its intrinsic value, it may be a smart investment.

Understanding Intrinsic Value

There are many ways of calculating the intrinsic value of a company or stock.

A common practice by Financial analysts is to use fundamental and technical analyses to gauge its actual financial performance to determine an asset's intrinsic value.

The often used metric in calculations for intrinsic value is discounted cash flows. This is often seen in valuation models using qualitative, quantitative and perceptual business factors.

But as investors we need to keep in mind that intrinsic value of a company is still only an estimate, even though we could use both qualitative and quantitative factors to measure the intrinsic value of a company.

Qualitative factors are such things as business model, governance, and target markets—items specific to the what the business does.

Quantitative factors refer to financial performance and include financial ratios and financial statement analysis. Perceptual factors refer to investors' perceptions of the relative worth of an asset.

These are largely accounted for by means of technical analysis.

Generally speaking, intrinsic value can be considered to be how much the business is worth, as determined by selling off the whole business and its assets.

How to Calculate Intrinsic Value

Using discounted cash flow (DCF) analysis, cash flows are estimated based on how a business may perform in the future.

Those cash flows are then discounted to today’s value to obtain the company's intrinsic value. The discount rate used is often a risk-free rate of return, such as that of the 30-year Treasury bond.1 It can also be the company's weighted average cost of capital (WAAC).

Here is the formula that I used to help me determine the intrinsic value programmatically.

The necessary data is fetched from data vendor

Data like cash and short term investments, total debt, cash flow and number of outstanding shares of the company are all fetched by subscribing to data vendor.

This would make our work much easier.

Data Required for Intrinsic Value Calculation

Here is a glimpse of how the data for AAPL and MSFT are fetched to calculate its discounted cash flow and if you noticed the discount rate is automatically derived.

AAPL has a discount rate of 7.5 and MSFT has a discount rate of 6.

Data For Apple (AAPL)

Data for Microsoft (MSFT)

Calculation of Discounted Cash Flow

The program perform a calculation of the discounted cash flow, below are 2 example that was done by AAPL and MSFT.

In deriving the discounted cash flow, do remember to take note of the discount rate, you may determine the rate by using Beta(which can be fetched from data subscription).

The intrinsic value of AAPL is lower than its current price (data is fetched as of the time of writing). This would make current AAPL price overvalued, but is it true?

Remember we should use the intrinsic value as a guide.

The intrinsic value of MSFT is lower than its current price (data is fetched as of the time of writing). This would make current MSFT price overvalued, but is it true?

Remember we should use the intrinsic value as a guide.

Summary

We should always use the intrinsic value as a complement to our own technical analysis to determine whether this investment is good or not.

There are many more factors to consider in an investment or trading.

Appreciate if you could share your thoughts in the comment section whether you use intrinsic value as part of your trading or investment analysis? are you using the same formula that I share?

Do like, share and comment on this article if you find this trading thought useful.

@TigerStars @Daily_Discussion appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.