Stock Fair Value Calculator
An advanced tool to estimate the intrinsic value of a stock using a two-stage Discounted Cash Flow (DCF) model. Discover if a stock is potentially undervalued or overvalued based on its future earnings potential.
Calculate Intrinsic Value
The company’s trailing twelve months (TTM) diluted earnings per share. This is a dollar value.
Please enter a valid number.
The expected annual EPS growth rate for the next 5 years.
Please enter a valid percentage.
The perpetual growth rate assumed after the initial high-growth phase. Often tied to long-term inflation or GDP growth (e.g., 2-3%).
Please enter a valid percentage.
Your minimum required annual return. This rate is used to discount future earnings back to their present value. A common starting point is 8-12%.
Please enter a valid percentage.
Estimated Fair Value Per Share
Terminal Value at Year 5: $0.00
PV of Terminal Value: $0.00
PV of Forecasted EPS (Years 1-5): $0.00
Projected vs. Discounted Earnings Per Share
This chart visualizes the projected future EPS versus its value in today’s dollars (Present Value).
Discounted Cash Flow Projection Table
| Year | Projected EPS | Discount Factor | PV of EPS |
|---|
What is a Stock Fair Value Calculator?
A stock fair value calculator is a financial tool designed to estimate the intrinsic or “true” worth of a company’s stock, independent of its current market price. The core idea is to determine what a stock should be worth based on its ability to generate future earnings. If the calculated fair value is significantly higher than the market price, the stock may be considered undervalued, presenting a potential buying opportunity. Conversely, if the fair value is lower, the stock may be overvalued.
This specific calculator uses a popular method called the **Discounted Cash Flow (DCF) model**. It projects a company’s future Earnings Per Share (EPS), and then discounts those future earnings back to what they would be worth today. This process accounts for the fundamental finance principle of the time value of money: a dollar today is worth more than a dollar in the future. Anyone looking to make investment decisions based on fundamentals rather than market hype, from individual investors to professional analysts, can use this type of calculator.
Stock Fair Value Formula and Explanation
This calculator employs a two-stage DCF model. First, it calculates the present value of earnings over a short, high-growth period (5 years). Second, it calculates the “Terminal Value,” which represents the value of all earnings from Year 6 into perpetuity, and discounts that lump sum back to the present.
The formula for the present value (PV) of a single future cash flow (CF) is:
PV = CF / (1 + r)^n
Where ‘r’ is the discount rate and ‘n’ is the year number.
The **Terminal Value (TV)** is calculated at the end of the forecast period (Year 5) using the Gordon Growth Model:
TV = (EPS in Year 5 * (1 + g)) / (r – g)
Where ‘g’ is the perpetual or terminal growth rate. The final Fair Value is the sum of the present values of all cash flows from the forecast period plus the present value of the Terminal Value. For a deeper dive into the methodology, see our guide on the DCF analysis tool.
Variables Table
| Variable | Meaning | Unit | Typical Range |
|---|---|---|---|
| Current EPS | The company’s most recent annual earnings per share. | Currency ($) | Varies widely |
| High-Growth Rate | The expected annual earnings growth for the next 5 years. | Percentage (%) | 5% – 20% |
| Terminal Growth Rate | The stable, perpetual growth rate assumed after Year 5. | Percentage (%) | 2% – 4% |
| Discount Rate | The investor’s required rate of return. | Percentage (%) | 7% – 15% |
Practical Examples
Example 1: Stable, Mature Company
Imagine a well-established utility company. It’s profitable but not growing rapidly.
- Inputs: Current EPS: $8.00, High-Growth Rate: 5%, Terminal Growth Rate: 2.5%, Discount Rate: 8%
- Results: The calculator might estimate a fair value of approximately $117. If the stock is trading at $95, this model suggests it is undervalued.
Example 2: High-Growth Tech Company
Consider a rapidly expanding software company reinvesting heavily into its business.
- Inputs: Current EPS: $3.00, High-Growth Rate: 20%, Terminal Growth Rate: 4%, Discount Rate: 12% (higher due to more risk/uncertainty)
- Results: The calculator might yield a fair value of around $85. Much of this value comes from the high expectations for future growth. If this stock is trading at $120, the market is even more optimistic than our model, suggesting it might be overvalued. A better tool for this might be an intrinsic value calculator that considers different models.
How to Use This Stock Fair Value Calculator
- Enter Current EPS: Find the company’s latest trailing twelve months (TTM) diluted Earnings Per Share from a reliable financial data provider.
- Estimate Growth Rates: Input your estimate for the company’s earnings growth over the next 5 years. Then, enter a more conservative perpetual growth rate for the long term. Analyst estimates or a company’s past performance can be a guide.
- Set Your Discount Rate: Determine your personal required rate of return. This is a crucial and subjective input. A higher rate means you demand more return for the risk, which lowers the calculated fair value. For more on this, read our article discount rate explained.
- Analyze the Results: The calculator instantly provides the estimated fair value per share. Compare this to the current market price to form an opinion on its valuation. Also, review the intermediate values to understand how much of the valuation comes from near-term forecasts versus the long-term terminal value.
Key Factors That Affect Stock Fair Value
- Earnings Power (EPS): The most direct driver. Higher current and future earnings translate directly into a higher fair value. A detailed earnings per share guide can provide more context.
- Growth Expectations: The rate at which earnings are expected to grow is a major determinant of value, especially for younger companies. Small changes in the growth rate assumption can have a large impact on the final valuation.
- Interest Rates: General market interest rates heavily influence the discount rate. When risk-free rates (like government bonds) rise, investors demand higher returns from stocks, increasing the discount rate and lowering fair values.
- Company-Specific Risk: The stability of the business, its competitive advantages (moat), and the quality of its management all factor into the discount rate. A riskier business warrants a higher discount rate.
- Economic Conditions: Broader economic health affects consumer spending, business investment, and ultimately, corporate earnings. Recessions can lower growth expectations across the board.
- Industry Trends: A company in a declining industry will have a much harder time growing its earnings than one in a burgeoning sector like AI or renewable energy.
Frequently Asked Questions (FAQ)
No. A stock fair value calculator provides an estimate, not a certainty. The output is highly sensitive to the input assumptions (especially growth and discount rates), which are subjective. It’s a tool for analysis, not a crystal ball.
It depends on your personal return requirements and the risk of the stock. A common approach is to start with the average long-term stock market return (8-10%) and add a premium for company-specific risk. A more aggressive investor might use a higher rate (12-15%).
This is common in DCF models. It reflects the fact that a company is expected to operate and generate earnings for a very long time, and the sum of those distant earnings is significant, even when discounted.
This specific model is not suitable for companies with negative earnings, as the math breaks down. For such companies, analysts often use different valuation methods, like Price-to-Sales or an advanced DCF analysis tool based on projected future free cash flow instead of EPS.
EPS is widely available on financial websites like Yahoo Finance, Google Finance, or your brokerage platform. Growth rate estimates can be found in analyst reports or you can derive them by looking at the company’s historical performance.
Fair value is an estimate of a stock’s intrinsic worth based on financial models. Market price is simply the last price at which the stock was traded on an exchange, determined by supply and demand. Value investors aim to buy stocks when the market price is below their estimated fair value.
The Graham number calculator uses a different, simpler formula focused on EPS and Book Value Per Share to find a conservative valuation for defensive investors. A DCF model is more detailed and forward-looking, attempting to project cash flows over many years.
They almost certainly will be, to some degree. The future is uncertain. The best practice is to run the calculation with a range of assumptions (e.g., a base case, an optimistic case, and a pessimistic case) to see a range of possible fair values. This is known as sensitivity analysis.