Question

I need some help with this question,

Discuss the relationship between fundamental analysis and intrinsic value. Include real-world examples in your explanation.

Answer 1

There is a direct relationship between fundamental analysis and intrinsic value. Fundamental analysis can be defined as a method of analysis in which a stock’s intrinsic value is determined. This is done by analyzing the economic as well as financial factors of the stock. Fundamental analysis involves study of macroeconomic factors which includes economic conditions at large and specific to the stock being analyzed, of the condition of the industry in which the company has stock is being analyzed is present in. It also includes study of microeconomic factors like the quality of management of the company.

The objective of fundamental analysis is to determine the intrinsic value of the stock so that investors can compare it to the current price of the stock and determine if the stock is undervalued or overvalued.

To give real world examples fundamental analysis is often done by equity analysts and research firms when they cover a stock during their initiating coverage. Fundamental analysis is also done by analysts when a company comes out with its IPO. For instance when Tesla Motors came out with its IPO in the year 2010 many equity research companies did a fundamental analysis to determine the intrinsic value of Tesla’s stock and then recommended whether investors should buy Tesla’s stock or not. These equity research companies did a comprehensive analysis of all relevant macro and micro economic factors affecting Tesla like state of economy, GDP growth rate, inflation rate, corporate governance at Tesla, earnings projections and visibility for Tesla, its competitive position in the market, its competitive advantage etc.