What is a Price Target?

A price target is like a weather forecast…

Meteorologists use a range of factors like current weather trends and historical averages to give you their best guess of what the weather is going to be like in the future. A price target works the same way. Stock analysts look at factors like historical and projected earnings to give investors a forecast of what they think is a fair price for that stock.

A price target is a forecast of the future price of a security. Analysts create price targets to estimate the future value of share prices. Some investors use these in the hopes of making better informed decisions about when to buy, sell, or hold onto a security. Price targets can apply to any type of security, such as common stock.

Price targets can go up and down in relation to what’s happening in various markets. If you see an analyst increase a stock’s price target, that means they think its share price is going to go up. If they lower their price target, they expect share prices to drop.

It’s critical to bear in mind that price targets are just one analyst’s opinion, and they are not always correct. That’s why traders typically only use price targets as a rough guide for what a stock may or may not be worth.

Stock brokers and analysts will typically develop price targets by looking at factors like a security’s earnings per share (EPS), company valuations, historical trends, economic conditions, and the behavior of relevant competitors.

Price targets normally look at where the analyst thinks a stock should be trading in the next 12 to 18 months.

There are several formulas that analysts use to create price targets for different asset types. But it’s important to note that different investors use different equations and factors when calculating price targets. As a result, you’ll often see different price targets for the same security.

Price targets are normally published in analyst reports on particular companies or markets. Those reports also often include the analyst’s buy, sell, or hold recommendations for that company or security.

Price targets give traders an informed guess about what shares in a given security should be worth.

Stock analysts look at several different factors when developing a price target for an asset. An analyst might use a quarterly or annual report to look at a company's earnings, cash flow, revenue, shareholder dividends, or sales.

It’s important to remember, however, that a price target is just an opinion on what an asset is worth. There’s no guarantee when you purchase common stock it'll actually reach its price target.

Different analysts also factor in different elements of a company’s performance when creating a price target, so you tend to see different price targets for the same security.

A price target can cover any time frame. Because stock brokers or analysts create their own stock price targets, they get to make their own predictions about how long it may take for those stocks to reach their projected value.

Price targets are normally set for either 12 months or 18 months.

Some traders rely on research reports compiled by professional technical analysts to figure out the price targets of stocks. But it’s possible to set your own price targets for various securities. Some traders set a percentage gain as their price target, and others perform additional research and apply formulas to create their own price targets.

Although analysts get to pick and choose their own calculation methods, they generally calculate price targets by creating a multiple of a security’s current and forward price-to-earnings (PE) ratios.

A PE ratio tells you how much investors are currently willing to pay for each dollar’s worth of profit a stock generates. You can calculate a security’s PE ratio by dividing its price per share by earnings per share. For example, let’s say common stock in a car manufacturer is trading for $110 per share, and its earnings per share over the last 12 months is $15.50 per month.

You've then got a current PE ratio of $7.09. That means investors are willing to pay $7.09 for each dollar of profitability in that stock.

Price per share ($110) ÷ Earnings per share ($15.50) = PE ratio ($7.09)

To calculate your price target, you’ll need to work out the stock’s forward PE ratio. A forward PE ratio is how much you expect the earnings-per-share of a stock to change over the next 12 months. You can find your forward PE ratio by dividing current price per share by your EPS forecast over the next 12 months.

After working out your current PE ratio and your forward PE ratio, you’re ready to calculate the price target. The most commonly used formula for price target is:

Price target = (Current PE ratio / Forward PE ratio) x Current Price

To illustrate that a little better, let’s jump back to our example of stock in that big public car company. We know the current PE ratio is $7.09. Let’s say you’ve worked out a forward PE ratio of $6.12 based on expected growth in earnings. First, you’d divide $7.09 by $6.12. That leaves you with 1.16. Finally, take your current stock value of $110 per share and multiply that by 1.16.

You’re then left with a price target of $127.60. Based on historical earnings, current stock price and projected future earnings per share, this price target supposes your stock will be worth $127.60 per share in 12 months’ time.

When an analyst sets a price target, that target is typically a forecast about what that individual believes the fair value of a stock will be worth in the future. But no matter how well-informed that forecast is, a price target is still just an educated guess about what will happen in the future. That doesn’t mean it'll happen.

Price targets are typically calculated by dividing your current PE ratio by your forward PE ratio, and then multiplying the resulting figure by your current stock price. The tricky part here is that nobody knows exactly what the forward PE ratio will be. That's because it represents the EPS a security will have generated in a year’s time.

All a technical analyst can do is look at historical earnings, economic trends, and other company data to develop the most likely projection they possibly can.

As a result, the actual market price of a stock (which is what it’s currently trading at) may not always match the price target an analyst has set. That’s why analysts will often publish revised price targets periodically as new information comes in or if market data changes dramatically.

Because price targets are future projections, stocks don’t often hit those targets. The actual price of a security may look like it’s on an uptrend or a downtrend, but things can change really quickly.

There may be all sorts of events and conditions a technical analyst failed to bear in mind when working out the target price of a stock, so targets are generally only used as a rough guide for traders.

In a 2012 study conducted by the University of Waterloo and Boston College, researchers looked at price targets set by 11,000 analysts in 41 countries and found that only 30% of the 12-month targets turned out to be reliably accurate. When looking at short-term price targets, only 18% of stocks hit their three-month horizon.

If you’re on the hunt for current analyst price targets and stock ratings, there are plenty of online sources worth checking out.

Many technical analysts publish daily or weekly reports around markets like the New York Stock Exchange (NYSE), indices like Nasdaq or the Dow Jones, or what they believe are currently the best stocks for trading. Analysts then set price targets and explain the rationales behind those targets. A lot of analyst reports also include buy ratings or sell ratings.

You can also look at online financial hubs like the Markets section of the Wall Street Journal or CNN Business. These types of sites often compile daily aggregates from multiple analysts to give you a general consensus across the market on target price.

Analysts price targets are not a reliable predictor of future stock movements. They are only guesses. All investing carries risk. Always keep investment objectives in mind.