What is a stock's fair value?
A stock's fair value is an estimate of what the business is worth based on the cash it is expected to generate in future, rather than what the market is charging for it today. The most common method, a discounted cash flow (DCF), adds up those future cash flows and adjusts them for time and risk. It is an estimate, not a price target.
Fair value matters because market prices swing on sentiment, headlines, and momentum, while the underlying worth of a business changes more slowly. Comparing today's price with an estimate of fair value gives a sense of whether a stock looks expensive, cheap, or roughly reasonable, a discipline that helps a reader resist overpaying in an exciting story.
A discounted cash flow works in three steps: project the company's future free cash flows, discount them back to today's money using a rate that reflects risk, and add the results to get a present value. Because it rests on assumptions about growth and discount rates, small changes in those inputs move the answer a lot, which is why fair value is best treated as a range, not a single exact figure.
Frequently asked questions
What does a discounted cash flow (DCF) actually do?
It estimates what a business is worth by projecting its future free cash flows and then discounting them, reducing their value to reflect that money in the future is worth less than money today. The discounted figures are summed to arrive at an estimated present value.
Why do fair-value estimates differ so much?
A DCF depends on assumptions about future growth, profit margins, and the discount rate. Reasonable people choose different inputs, so their estimates differ. That is why fair value is best seen as a range and paired with a margin of safety rather than trusted as a precise number.