Valuation answers the fundamental question: "What is this company (or asset) actually worth?" It is the foundation of investing, M&A, IPOs, and corporate finance. Get valuation wrong, and you overpay for acquisitions, misprice IPOs, or make terrible investment decisions.
Three main approaches: DCF (Discounted Cash Flow) — projects future cash flows and discounts them to present value; comparable company analysis — compares financial ratios (P/E, EV/EBITDA) with similar public companies; and precedent transactions — looks at prices paid in similar M&A deals. DCF is considered the gold standard but requires many assumptions.
Famous valuation debates: Was Tesla overvalued at a $1 trillion market cap with less than $100 billion in revenue? Was Microsoft's $69 billion acquisition of Activision Blizzard a fair price? Valuation is part science, part art — the same company can be "cheap" by one metric and "expensive" by another.