What Is Price Target?
A price target in the context of stock markets means the expected valuation of a stock in the coming future. The valuation may be done either by the stock analysts or by the investors themselves. For an investor, a price target reflects the price at which he will be willing to buy or sell the stock at a particular period or mark an exit from their current position.
It is helpful for all financial and investment products and determines how much the security price will be a few months or years later. It depends to a great extent on the financial condition of the company and its future growth prospects. Analysts calculate this value and publish in reports to recommend investors regarding the buy, sell, or hold decisions.
Table of contents
- A price target refers to the expected stock valuation in the future. In this process, the stock analysts or the investors perform the valuation.
- It shows the price for an investor at which they may trade the stock at a specific period or record withdrawal from the existing setting.
- It helps investors to understand the right time to exit or enter the market.
- It needs expert prediction. Therefore, an individual investor may need help to perform the calculations and must depend only on market experts.
Price Target Explained
Price target is the value of securities that calculate and project for the future. These prices are the views of stock analysts regarding the performance of companies in the coming days based of their past and present condition.
Various methods are used to do the price target research and determine this price, among which the price to earning ratio and the discounted cash flow technique are very common.
It is a concept used by market analysts who watch the company’s stock and analyze various factors affecting its price, price-to-earnings ratio, etc. Then, they use price targets to give opinions on different stock positions.
However, this does not guarantee that the price quoted by analysts cannot change. There is always a possibility of fluctuations a per the market conditions are any unpredictable change in company operations and management.
Let us look at the price target formula to understand it.
Price Target = Current Market Price * [(Current P/E) / (Forward P/E)]
There are two types of P/E used in the above formula: Current P/E and Forward P/EForward P/EForward PE ratio uses the forecasted earnings per share of the company over the next 12 months for calculating the price-earnings ratio. Forward PE ratio formula = Price per share/Projected earnings per share .
- Current P/E
This price-earnings ratioPrice-earnings RatioThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. uses the earnings for the past twelve months. Thus, the current market price is divided by the average earnings of the last twelve months.
- Forward P/E
In the Forward P/E ratio, the estimated earningsEstimated EarningsEarnings Estimate is the projection of earning of an entity for a given period. Future projects, cash flows, market conditions, and several other factors are considered in calculating this estimate. for the next twelve months are considered. The ratio is calculated by dividing the market price by the average estimated earnings for the next twelve months.
The above ratios are helpful as price target calculator for analysts.
Thus, we see that the price target formula mentioned above is used to calculate it.
A stock of a company is trading at $80 currently. The current earnings per share are $2. However, the estimated earnings per shareEarnings Per ShareEarnings Per Share (EPS) is a key financial metric that investors use to assess a company's performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is. are $2.5.
- Current P/E = 80/2 = $40
- Forward P/E = 80/2.5 = $32
Calculation of Price Target
- = 80 * (40/32)
- = $100
- The price target upside is that it helps an investor decide whether he should hold the stock in expectation of an increase in future price or sell the share as it has already reached its target.
- It helps investors to decide the right time to exit or enter the market.
- It is based on the estimates of the future price-to-earnings ratio, which in turn means it depends on future earnings estimates. Unfortunately, it is difficult to predict future earnings accurately. Thus, the target price is subject to the limitation that the forecast may not be accurate, and the actual price can be different from the target price, affecting the investor’s strategy.
- It involves expert prediction. Thus, an individual investor may not be able to do the calculations using any price target calculator and will need to depend only on market experts.
Price Target Vs Fair Value
A price target research estimates the price at which the investors are expected to buy or sell a particular stock. It does not reflect the actual worth of the stock. The investors will use it to decide whether it will be appropriate to buy or sell the stock based on its current market price, or the investor can wait to take his position.
On the other hand, the fair value of a stock reflects the stock’s intrinsic value or actual worth of the stock, in other words. Therefore, it helps investors decide whether a stock is overvalued or undervalued. Furthermore, the price target upside is that an investor can determine whether it is a good deal to buy or sell the stock regarding the current market price and fair value.
Frequently Asked Questions (FAQs)
Even with the analyst’s best efforts, a price target is still a guess with the variance in analyst projections connected to future performance estimates. However, even today, studies show that the total accuracy rate is about 30% in the case of price targets with 12-18 months horizons.
The average price target for Apple is $170. It is based on 32 Wall Street Analysts’ 12-month price targets issued in the past 3 months. The highest analyst price target is $210.00. The lowest is $107.00. The average price target shows a 12.93% rise from the current $150.88.
The 38 analysts providing 12-month price forecasts for Tesla Inc. have 200.00 as a medium target, with a 320.00 high estimate and a 24.33 low estimate. The median estimate shows a +1.08% rise from the last price of 197.86.
The 12-month price forecasts by 33 analysts providing for NIO Inc. have a 17.10 medium target, with a 28.26 high estimate and an 8.16 low estimate. The median estimate displays a +56.76% rise from the last price of 10.91.
This article is a guide to what is Price Target. We explain it with formula, example, advantages, disadvantages and differences with fair value. You may learn more about financing from the following articles: –