Stock valuation is the attempt to estimate what a company's share is actually worth, independently of whatever the stock market currently happens to be paying for it. The standard approach estimates a company's expected future cash flows, the profit it's likely to generate over time, and discounts those future amounts back to a present value, since money received later is worth less than the same amount received today. That estimated value is a genuinely different number from a stock's current market price, and the relationship between the two, whether they should always match, and what it means when they don't, is one of the more contested questions in finance.
Discounting future cash flows gives valuation a rigorous, if uncertain, foundation
Estimating a company's intrinsic value means projecting its future cash flows, forecasts that are themselves genuinely uncertain, and discounting each projected amount by a rate that reflects both the time value of money and the risk that the projection might not pan out. A company expected to generate steady, highly predictable cash flows gets discounted at a comparatively low rate, while a company with much less certain prospects gets discounted more heavily, since investors demand greater compensation for bearing greater uncertainty. The resulting estimated value is only ever as reliable as the underlying forecasts feeding into it, which is exactly why two careful analysts can reach genuinely different valuations for the very same company.
Whether market price tracks that estimated value is itself a live debate
Some economists argue markets are efficient enough that a stock's current price already reflects all publicly available information about a company's future prospects, making the market price itself the best available estimate of intrinsic value at any given moment. Others argue markets can and do misprice stocks for meaningful stretches of time, driven by crowd behaviour, incomplete information or plain miscalculation, leaving real, exploitable gaps between market price and a company's actual estimated worth. This disagreement is exactly what separates investors who trust market prices to already reflect fair value from those who build entire strategies around trying to find stocks the market has, in their judgement, gotten wrong.
What we're still unsure about
That discounted future cash flows provide a rigorous, widely used framework for estimating a company's intrinsic value is well established, standard practice across corporate finance and equity analysis. What remains a genuinely unresolved, actively contested question is exactly how efficiently real stock markets actually incorporate available information into current prices, since the evidence is genuinely mixed, some studies support markets pricing efficiently most of the time, while others document real, persistent mispricings and asset bubbles, and financial economists continue to actively disagree about how large and how exploitable any gap between market price and true value really is, rather than that question being settled either way.
This sits inside Equity Markets & Stock Valuation, one of eight topics in Finance, one of five domains in Economics, one of seventeen subjects the app can quiz you on.