Fair Value

What is Fair Value? — Definition

Fair value is the price an informed, rational buyer and seller would agree on in an arm's-length transaction. In investing, it's used to describe what an analyst believes a stock is intrinsically worth based on its fundamentals — earnings, growth, cash flows, and risk. It is determined through models like DCF analysis, comparable company analysis, or asset-based valuation.

Market price and fair value diverge constantly. In euphoric bull markets, stocks trade well above fair value. In panics, they trade below. The goal of fundamental analysis is to identify this gap and buy when the stock trades at a significant discount to fair value — a margin of safety.

Example

If a DCF analysis suggests a stock is worth $100 per share and it's trading at $70, you might say it has a 30% discount to fair value. Conversely, if it trades at $140, it may be overvalued by 40% relative to fair value.

BMInsider's 100X Insider Reports calculate fair value estimates for each featured company, giving subscribers a target price range and the key assumptions driving it.