A price target is a stock’s estimated future price, and it’s typically based on a company’s projected earnings, historical earnings, and economic conditions.
Wall Street equity research analysts typically provide stock price targets for the public companies that they cover. They also offer buy, sell, or hold recommendations. While there’s no guarantee a stock will hit an estimated price target, it can be helpful to review what analysts are forecasting for the stock.
Here’s everything you need to know about stock price targets and how to use Wall Street analyst reports to make wiser investment decisions.
What Is a Price Target?
A price target is a projection of a security’s future price, typically over the next 12 to 18 months. Analysts can estimate price targets for various securities, including stocks, bonds, and other assets.
Price targets show what analysts think is a fair price for the stock. To determine a stock’s price target, analysts use various valuation methodologies to forecast a company’s future earnings. Based on the calculated price target, analysts will publish reports alongside their recommendations to buy, sell, or hold the stock in question.
Pro Tip: You can easily access Wall Street analysts’ price targets and buy, sell, hold recommendations on thousands of stocks globally at TIKR.com.
How Do Stock Price Targets Work?
Price targets tell you if a given stock is fairly valued based on its historical and projected earnings.
Investors often use price targets as reference points for making decisions about buying, selling, or holding stocks. However, it’s important to note that analyst price targets often change with what’s happening in the overall market.
If analysts increase a stock’s price target, they think its share price will increase. Conversely, lowering their price target means that analysts expect the share price to fall.
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Factors for Determining Stock Price Targets
Determining a stock’s price target involves considering several factors, including:
- Earnings Per Share: This is one of the key metrics analysts use when calculating stock price targets.
- Supply and Demand: Price targets are founded on assumptions about a security’s future supply and demand dynamics. Changes in market sentiment can significantly influence a stock’s projected value.
- Technical Levels: Technical analysts rely on indicators, price patterns, trends, and momentum to forecast a security’s future price. Identifying areas of support and resistance aids in establishing price targets.
- Fundamentals: Analysts often base price targets on metrics like the price-to-earnings (P/E) ratio. This involves multiplying a company’s market price by its earnings, providing insight into valuation.
How Stock Price Targets are Calculated
Analysts calculate price targets differently. One method is using the price-to-earnings (P/E) ratio. The analyst forecasts Earnings Per Share (EPS) and multiplies them by a P/E multiple. The resulting number is the price target.
For instance, Wall Street analysts currently forecast a $202 consensus target stock price for Google (GOOGL) stock.
This is an NTM (next twelve months) EPS forecast of $8.07 multiplied by an NTM P/E multiple of ~25x.
Today, the stock trades for ~$163, which implies a 24% return from Google’s current share price to analysts’ consensus price target.
How to Interpret Stock Price Targets
With a price target, you can tell if a stock is fairly valued, undervalued, or overvalued relative to its projected and historical earnings.
For example, if an analyst sets a target price higher than the current price, it means that analysts expect the stock to rise in the future. In this case, analysts believe the stock is undervalued and may suggest buying it because there’s a potential for a share price increase.
On the other hand, if the price target is lower than the current price, analysts expect the stock to fall. The analyst may believe the stock is overvalued and, therefore, suggest selling it.
It’s important to remember that price targets change, which may not always be accurate.
How Accurate are Analyst Price Targets?
While analysts put a lot of effort into determining stock price targets, they’re not always accurate. Price targets are an educated guess about what will happen over the next 12 to 18 months. Analysts often revise price targets as the overall market changes or new information comes in.
Analysts are humans and may let cognitive biases sway their judgments. For example, an analyst may overestimate a company’s future earnings simply because they’re overconfident about the company’s prospects.
FAQ Section
What is the difference between a stock’s price target and its current price?
A stock’s price target reflects its expected future price, while its current price is what the stock is trading for at the moment in the market.
Are stock price targets accurate predictors of future stock prices?
Stock price targets are not always accurate predictors, as they rely on assumptions and forecasts that may change due to unforeseen market conditions or company developments.
Why do stock price targets change over time?
Stock price targets change over time as analysts revise their forecasts based on new information, such as earnings reports, market trends, or changes in company outlook.
Should investors rely on stock price targets when making investment decisions?
Investors should not rely solely on stock price targets; they should use them as one of several tools in a broader investment strategy. Investors should consider other factors like company fundamentals and their own risk tolerance.
How do stock price targets influence investor behavior?
Stock price targets can influence investor behavior by shaping expectations and market sentiment, sometimes driving stock price movements based on bullish or bearish analyst forecasts.
TIKR Takeaway
Wall Street analysts provide stock price targets based on their forecast of a stock’s earnings.
Consensus price targets are the average of all sell-side analysts’ price targets, and are reported on many investment research platforms, including TIKR.
The TIKR Terminal offers industry-leading financial information on over 100,000 stocks, helping you find undervalued stocks.
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