Predicting the future as a profession is extremely challenging, but it's a task that equity analysts must face when they head to work every day. Given these difficulties, most find it easiest to rely on guidance directly from the companies they follow, or they huddle close together so that they don't stick out like a sore thumb if their projections fall dramatically off the mark. (For additional reading, also check out Analyst Forecasts Spell Disaster For Some Stocks.)
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As hard as the profession may try, there are notable examples where an analyst's predictions turned out to be quite far from reality. This can be due to a number of factors. For example, some analysts may use bold targets and predictions to stand out from the crowd, or are they are simply optimistic for a firm's (or stock market's) forward prospects. Others can simply fall victim to deceitful practices and figures from company management teams. Below are four examples of targets that turned out being drastically off the mark.
Toward the end of 1998, then CIBC Oppenheimer analyst Henry Blodget sent shares of online retailer Amazon 19% higher when he raised his target price to $400 per share. A report at the time also detailed that he estimated the company could hit $10 billion in sales and $10 in earnings per share within five years, which would have been by the end of 2003.
It's worth noting that Blodget's targets were wide off the mark at the time, but he has since been proven right as Amazon hit more than $10 billion in sales in 2006 and the stock, which split three-for-one in January 1999 and again split two-for-one in September 1999, is well above the pre-split levels of around $80 per share back in 1998. It also worth noting the Amazon was primarily an online seller of books and Blodget foresaw its diversification into other areas in retailing.
Outright fraud is extremely difficult for analysts to undercover. Any analyst that issued a price target of any sort on energy distribution firm Enron was eventually proven wrong as the company declared bankruptcy in December 2001. The company's black-box business model was as opaque as can be and meant many analysts simply took management's numbers on faith.
In late 2001, a number of analysts continued to hold out hope and had lofty price targets. One analyst lowered his target from $102 to $70, which was based on a P/E multiple of 32-33 on $2.15 in earnings and zero for a broadband business that was anticipated to broker pricing for the vast amounts of data that would be surging through the internet within years. As it turned out, the company's business model, along with its stock and analyst profit projections, were all a mirage. (Learn more about Enron in Enron's Collapse: The Fall Of A Wall Street Darling.)
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Online advertising and search engine firm Google has had many ambitious price targets and earnings estimates placed on it since it went public in August 2004 at $85 per share. Price targets in 2006 included a $600 per share estimate, which turned out to be a reachable target as the stock hit $600 around October 2007.
However, one analyst in 2006 went one step further and suggested a share price of $2,000 per share. He also estimated potential sales of $100 billion. Google shares hit over $700 per share as 2007 came to a close, but a target of $2,000 remains well off the mark, as does the aggressive sales forecast as Google is forecast to report just under $35 billion in sales for all of 2011.
The Boldest Stock Market Price Target
Released just before the peak of the dot-com market in March 2000, in September 1999 James Glassman and a colleague published a book with the title "Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market." The book and date of release sum up the irrational enthusiasm for stock market returns at the time. Today, the Dow Jones trades at just over 12,000 and has traded below 8,000 two times since the book was published over 11 years ago.
The Bottom Line
The vast majority of incorrect or inaccurate estimates are made in good faith and simply end up being off the mark. The other instances, such as those above, are rare and the analyst ends up making a name for him or herself because the prediction fell so wide of the mark. Though rare, they serve as reminders to reign in enthusiasm on the future, especially when it is difficult to find strong supporting facts for making such optimistic predictions. (For related reading, also take a look at Analyst Recommendations: Do Sell Ratings Exist?)
Disclosure: At the time of writing Ryan C. Fuhrmann did not own shares in any company mentioned in this article.