Welcome To The Long Wealth Newsletter (Tuesday, July 16th). (est. 6 min read)

In today’s newsletter we will go over:

• How to calculate the intrinsic value of a stock

• Why is intrinsic value important

• And much, much, more..

Actionable Tip Of The Day

Intrinsic value is the estimated "true worth" of a company's stock, based on its fundamental business characteristics, future earnings potential, and assets.

It's what investors believe a stock should be worth, regardless of its current market price.

Calculating intrinsic value helps investors identify undervalued or overvalued stocks for making informed investment decision.

Remember it's an estimate, not an exact science.

Here’s how to calculate the intrinsic value:

Let's use a simplified example to calculate the intrinsic value of a stock using the Discounted Cash Flow (DCF) method:

Example Company: LongWealth Inc.

Assumptions:

• Current Free Cash Flow: $100 million

• Expected growth rate: 5% per year for 5 years

• Discount rate: 10%

• Terminal growth rate: 2%

• Shares outstanding: 100 million

Steps:

1. Project cash flows for 5 years:

   1. Year 1: $105M,

   2. Year 2: $110.25M

   3. Year 3: $115.76M

   4. Year 4: $121.55M,

   5. Year 5: $127.63M

2. Calculate terminal value:

   (Year 5 cash flow / (Discount rate - Terminal growth rate)):

   $127.63M / (0.10 - 0.02) = $1,595.38M

3. Discount all future cash flows to present value:

   Sum of discounted cash flows: $579.19M

   Discounted terminal value: $991.25M

4. Add discounted cash flows and terminal value:

   $579.19M + $991.25M = $1,570.44M

5. Divide by number of shares:

   $1,570.44M / 100M shares = $15.70 per share

Intrinsic Value: $15.70 per share

This means, based on these assumptions, an investor might consider LongWealth Inc. undervalued if it's trading below $15.70, and overvalued if above.

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Deep Dive

Intrinsic value is important for several reasons.

1. Helps identify undervalued stocks

2. Prevents buying overpriced stocks

3. Helps assess if a stock's price reflects its true risk

4. Allows you to compare different stocks on a fair basis

5. Provides a logical framework for investing

Intrinsic value is like a compass for investors, helping navigate the complex world of stock markets.

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