Learn what an overvalued stock is and why a stock can trade above an analyst's estimate of intrinsic value.
An overvalued stock is a stock trading above what an investor or analyst believes is its intrinsic value. The term reflects a valuation judgment, not an objective fact known with certainty.
A stock may appear overvalued because growth expectations are too optimistic, margins are unlikely to hold, or the market is using an unusually high multiple. Different analysts may disagree because intrinsic value depends on assumptions.
If an analyst estimates intrinsic value at $40 per share but the stock trades at $55, the analyst would describe it as overvalued under that model.
An investor says, “If a stock looks overvalued, it must fall immediately.”
Answer: No. A stock can stay expensive for a long time if sentiment and growth expectations remain strong.