Intrinsic Value vs Relative Valuation

Intrinsic valuation builds value from the bottom up using the company's own fundamentals: you project free cash flows, discount them at a rate reflecting their risk (WACC), and add a terminal value. The DCF is the primary tool, with the dividend discount model a variant for financial firms. The strength is independence — it doesn't care whether the market is euphoric or panicked, only what the business will actually generate. The weakness is fragility: a DCF rests on a long chain of assumptions (growth, margins, WACC, terminal value), and small changes compound into very different answers. It's powerful but easy to manipulate and only as good as its inputs.

Relative valuation prices the target against the market by applying observed multiples (EV/EBITDA, P/E, EV/Revenue) from comparable public companies or from precedent M&A transactions. The strength is that it's grounded in real, observable market data and is fast, simple, and easy to communicate to a client. The weakness is that it inherits whatever bias the market has — if the entire sector is overvalued, comps will value the target high too. It also assumes truly comparable peers exist, which is hard for unique or diversified businesses, and precedent transactions carry a control premium that public comps don't.

No single method is 'right,' so practitioners triangulate. A standard valuation deliverable shows a football field chart with a range from each method — public comps, precedent transactions (usually highest, due to control premia and synergies), and a DCF — and looks for where they overlap. If the DCF says $50/share but comps cluster at $35, that gap is a flag to revisit assumptions or to understand what the market is missing or pricing in. Intrinsic value anchors you to fundamentals when markets are irrational; relative valuation keeps you honest about what buyers and sellers will actually transact at. The two together produce a defensible range rather than a false-precision single number.