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.
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.
Source: Investopedia, Price Target: How to Understand and Calculate Plus Accuracy, accessed 26 December 2023, <https://www.investopedia.com/terms/p/pricetarget.asp>