Do stocks have any intrinsic worth?

Question

If I buy my house at least I know there is an intrinsic value to the materials (and I can live in it). Does stock have any actual worth, besides what some other guy is willing to pay for it? (Some stocks offer a dividend, but not all of them do.)

Answer 1

Yes they do. The value is in the cash flow that they will eventually pay to their owners. Some companies pay out current cash flow as dividends, others, even though they pay no dividends are reinvesting profits in additional businesses, or expansion, so that they can generate even greater profits in the future.

I think share price is a poor indicator of intrinsic value. There are too many psychological factors at work in the market which cause shares to be worth more/less than their intrinsic values.

They are worth what the underlying assets and businesses can be sold for, or what those are worth. Figuring out what those values are can range from easy to difficult. One easy industry to value is oil tankers, because the values of ships are easy to find online. Taking the balance sheet, replacing the book values of the ships with the actual values, and recalculating the balance sheet will get you darned close to the intrinsic value of this sort of company. On the other hand, the value of the next hot dot-com...where its eventual profitability is anyones guess...good luck to anyone, even an expert at accurately valuing those.

Answer 2

Your question is one of the most difficult yet basic of questions in finance to answer.

Ultimately, there are three answers:

1) No stock has any value except what anyone else is willing to pay for it. (Not very satisfiying, is it? We're looking for something fundamental, not practical)

2) A stock is worth the present value of the discounted dividend flow. As you pointed out, however, most stocks don't pay dividends, and if they do, they pay very little. On the other hand, U.S. tax law is biased against dividends, so most companies buy back shares, which usually raises the price of the remaining shares, in effect paying a dividend. (This method is the accepted theoretical model, but is not very practical)

3) A stock is worth whatever portion of the company that it represents. For example, if you own 10% of a restaurant that generates $10,000 in profits a year, then you "own" $1,000 in profits a year (greatly simplified). If you own 10% of the shares in a company that generates $10,000 in profits a year, then you "own" $1,000 in profits a year. The principal is the same.

This is the most favored answer, both practically and theoretically. In a practical sense, that's how investors calculate what a stock is worth. Theoretically speaking, this approach comes as close as possible to a good model of the real world, because stock, theoretically, is an ownership share of an actual business, so it "must" be valued the same way as any other business.

It seems complicated because, in practice, it is. For example, if you wanted to sell your restaurant ownership share, how much could you sell it for? You wouldn't sell it for $1,000 - that would be ridiculously low. However, you couldn't sell it for $100,000, either - too high. You'd have to find some kind of P/E multiple (a multiple of annual earnings) - like 10 times annual earnings. This P/E multiple would depend on other, similar restaurants, the risk of your restaurant, its stability, etc.

And that's roughly how financial institutions like investment banks, mutual funds, pension funds, and individual investors determine the "price" (which is their best guess of "value") of a stock at any point in time. Yes, these estimates change every minute of the day, stocks as a whole are often overvalued or undervalued, there are irrational swings in the prices of stocks, but overall, stocks are valued in this way.

As a final note, your house only has "value" in two senses: 1) what it's worth to you, and 2) what it's worth to someone else (in other words, how much some other guy is willng to pay for it). The same is true of a stock. What's it worth to you to own 1 share of a profitable business, even if you can't touch the profits? What's it worth to someone else?

Sorry, one last point. If it seems that it's worthless to own a tiny part of a profitable business when you can't touch the profits, the answer is that it is, but it doesn't matter - if a company overall if undervalued, a financial institution will likely come, buy the entire company outright, and take it private - essentially becoming the 100% owner, and taking all the profits. This helps keep companies properly valued, even if owning tiny shares of huge companies seems to have no value in and of itself.

Answer 3

Some companies have positive intrinsic value and some have negative. It also depends on how you value the company. If you're only looking at book value (as your example does with your house), the intrinsic value would be what's left of the company if they liquidated all their assets and paid off all their liabilities. If the company has more debt than equity then its book value would be negative. If you're looking at the company's discounted cash flow, the intrinsic value is based on all the money the company is going to make. Remember as a holder of that stock certificate, you are part owner of that company.

Answer 4

I respectfully disagree with the previous answers!
Stocks have a "book value" and that is closer pre-share to the value based on assets, machines, cash and other tangible goods.
Stock value is nebelous in that it is the markets preception: when a stock is valued at say, 18 to 1 price/earnings etc:
If a company were to put themselves on the "sales block" and liquidate; that probably is the closest true value of the company's worth in the open market.

Answer 5

Most stocks state on the shares an intrinsic value, usually one-tenth of a cent per share.

Other than that, they are worth what someone else will pay for them.

So, yes, they do, but the value is almost nothing.

Answer 6

Stocks represent a portion of the company that you own, so I would say yes.