What Is a Price Target?
A price target is an analyst's projection of a security's future price. Price targets can pertain to all types of securities, from complex investment products to stocks and bonds. When setting a stock's price target, an analyst is trying to determine what the stock is worth and where the price will be in 12 or 18 months. Ultimately, price targets depend on the valuation of the company that's issuing the stock.
Analysts generally publish their price targets in research reports on specific companies, along with their buy, sell, and hold recommendations for the company's stock. Stock price targets are often quoted in the financial news media.
Key Takeaways
- A price target is an analyst's projection of a security's future price, one at which an analyst believes a stock is fairly valued.
- Analysts consider numerous fundamental and technical factors to arrive at a price target.
- Analysts generally publish their price targets along with their buy, sell, and hold recommendations for a stock.
- Price targets for the same security can be different because of the various valuation methods used by analysts, traders, and institutions.
Understanding Price Targets
A price target is a price at which an analyst believes a stock to be fairly valued relative to its projected and historical earnings. When an analyst raises their price target for a stock, they generally expect the stock price to rise.
Conversely, lowering their price target may mean that the analyst expects the stock price to fall. Price targets are an organic factor in financial analysis; they can change over time as new information becomes available.
Factors That Help to Determine a Price Target
The price target is based on assumptions about a security's future supply and demand, technical levels, and fundamentals. Different analysts and financial institutions use various valuation methods and take into account different economic conditions when deciding on a price target.
For fundamental analysts, a common way to discern the price target for a stock is to create a multiple of the price-to-earnings (P/E) ratio—by multiplying the market price by the company’s trailing 12-month earnings.
In some cases, particularly with volatile stocks, analysts will look for additional guidance to form their price targets, which could include reviewing a company’s balance sheet and other financial statements and comparing them to historical results, current economics, and the competitive environment, studying the health of a company's management, and analyzing other ratios.
Technical analysts use indicators, price action, statistics, trends, and price momentum to gauge the future price of a security. One way that they arrive at a price target is to find areas of defined support and resistance. An analyst will do this by charting a price that moves between at least two similar highs and lows without breaking above or below those points at any point in between.
Special Considerations About Price Targets
For Traders
Traders will generally look to exit their position on a stock when the originally expected value of the trade has been recognized. Although price targets can help traders understand when to buy or sell a stock, traders can and should determine their own price targets for entering and exiting positions.
If You're a Sophisticated Investor
For individual investors, the assumptions that underlie analysts’ price targets are not always obvious. Investors should use analysts' price targets and recommendations as just one part of their investment due diligence, which could include reviewing a company's financials and regulatory filings, among other resources.
Despite the most careful analysis, we cannot know for certain the price at which a stock will trade in the future. Nevertheless, when a prominent analyst changes their price target, it can have a significant impact on the price of a security.
Price Targets Are Powerful Guesstimates
Accurately forecasting a security's price movement is based on projection, probability, numerous tools, and lots of experience. However, even for the most seasoned professional, a price target is still a calculated guess.Some portfolio managers believe that price targets, along with research reports, function mainly as marketing tools for brokerages and investment banks to generate interest in a security that they're underwriting.
How Are Price Targets Calculated?
Price targets try to predict what a given security will be worth at some point in the future. Analysts attempt to satisfy this basic question by projecting a security's future price using a blend of fundamental data points and educated assumptions about the security's future valuation.
Are Price Targets Accurate?
Despite the best efforts of analysts, a price target is a guess with the variance in analyst projections linked to their estimates of future performance. Studies have found that, historically, the overall accuracy rate is around 30% for price targets with 12-18 month horizons. However, price targets do have the ability to sway investor sentiment, especially if they come from credible analysts.
Where Are Price Targets Found?
Analysts generally publish their price targets in research reports on specific companies, along with their buy, sell, and hold recommendations for the company's stock. Stock price targets are often quoted in the financial news media.
