It is possible to purchase a stock without considering its intrinsic value. However, many value investors consider the intrinsic value an important aspect of stock selection. This type of analysis is somewhat less scientific than some technical analysts prefer, but value investors nonetheless find ways to estimate intrinsic value. The goal is to identify a stock with a true value that exceeds its current market value.
Intrinsic value is the concept that certain objects, in this case financial assets, hold a value simply by existing, or independent of outside factors. To put it in layman's terms, the stock of an iconic company such as Facebook or Coca-Cola might be worth more than the stock of a more generic company with the same balance sheet or trading volume. Intrinsic value extends beyond just brand recognition; intangible assets such as proprietary technology, patents, research and development, experienced management and customer loyalty can all factor into a company's "true" valuation.
Rather than only looking at the relative performance shown through the income statement or studying coverage ratios, value investing is all about understanding what makes a company successful and sustainable. It is a next-level stage of fundamental analysis.
Intrinsic value cannot be the only factor in weighing an investment decision. There are almost countless variables that can influence stock valuation. Several different methods are used to spot discrepancies between the market value of a stock and its true value. These include the dividend discount model, the residual income model and discounted cash flow (DCF). Value investors look for deals by spotting companies that are undervalued based on book numbers alone. They also avoid companies that seem to have book values in excess of their intrinsic values.