Why do analysts decide on a target price for a stock that is lower than its current price?

I am a beginner investor. I don't understand why analysts decide on a target price for a stock that is lower than its current price, versus a higher estimate that would bring in more profit. I know that analysts can create a mix of both Bull-ish and Bear-ish opinions of a stock value, but I have trouble understanding why a low share price is more profitable than a share selling for a high price. Am I forgetting that a lower target price is for Bear-ish and day trading investors who want to save money rather than make money? Am I failing to consider the importance of why a stock might be undervalued or overvalued, in addition to its time horizon, when considering its target price? What am I missing?

Investing, Stocks
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2 weeks ago

Danford, Dan

Saint Joseph - Kansas City, MO
93% of people found this answer helpful

An analyst’s “target price” is his/her best estimate of a stock’s future price. Since the stock market is an auction where buyers and sellers transact business, the analyst is trying to determine a solid estimate of future price based on company financials, industry trends, and economic factors.

Analyzing stock prices is not an exact science. Ten different analysts will arrive at ten different target prices depending on each one’s weighting of various factors. For traded stocks, they should each be starting with the same set of public financial data, but that entails a hundred or thousand data points for each stock. Plus, each analyst will apply their own process, experience, and judgment to that data.

Additionally, at least part of a stock’s value lies in future (estimated) data. Financial records necessarily look backwards, but the value to a new buyer lies in the company’s prospects. Will sales grow faster or slower in the future? Are margins in the industry rising or shrinking? Does the company have any product innovations in the pipeline? How about their competitors?

So, setting a target price is a judgment call. An informed analyst weighs all the past and future data with their own personal knowledge of the company and industry. From this, they set a target that they expect sometime in the future. Buyers or sellers can then use this target for their own decision-making about the stock.

Let’s say that a certain analyst sets a target for ABC stock at $25 per share. The stock is trading today for $20 per share. If you think this analyst is credible, then you might choose to buy ABC because you could make $5 per share (a whopping 25%) when the share price hits that target (again, timing of that price change is an estimate, too). Or if you question this analyst’s credibility, you can search to see what other analysts estimate for ABC before deciding.

An analyst sets the future target price with little regard to the price today. So, they might set a target price for ABC at $15. If you find that analysis credible, you’d probably decide to wait before buying (until the price falls to $15 or less) or sell if you already own it. Again, this is just one person’s judgment about the future price. You can use the information however you choose.

Importantly, really importantly, no one knows what will happen next with stock prices or any company. The fact that someone is an analyst following a stock does not make them right. They are simply an informed party doing their best to understand the company and landscape. Even the best analysts will be wrong sometimes.

As an investor, you are the final decision-maker. Learn as much as you can, choose credible people or companies for information, and exercise your own judgement when buying or selling. There are a million moving parts and it is impossible to predict the future.

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