What Is a Price Target?
A price target is the projected future price level of an asset as stated by an investment analyst or adviser. The price target is based on assumptions about the asset's future supply and demand, technical levels, and fundamentals. For individual traders, who may develop their own price targets for the assets they are trading, the price target is where they will look to exit their position as the originally expected value of the trade has been recognized. Price targets may change over time as new information becomes available.
How Price Targets are Determined
A price target is an analyst's or trader's expectation of the future price of an asset, such as a stock, futures contract, commodity, or exchange-traded fund (ETF).
An influential analyst on Wall Street may give a stock that is currently trading at $60 a one-year price target of $90. Since some traders rely on analyst's opinions, such a change in price target could have a positive impact on the stock price as traders seek to buy the stock based on the new price target.
Different analysts and financial institutions use various valuation methods and take into account different economic forces when deciding on a price target. Since valuation methods vary by analyst or trader, price targets will also vary. There is no way to know for certain the value at which a stock will trade in the future. A price target is a calculated guess.
Fundamental traders use financial statements and ratios, growth rates, and assess company management to help make price target projections.
Two separate investors holding a stock trading at $60 may have drastically different opinions about where the stock will go. One investor may set his price target at $75, while the other sets it at $120. Price targets are a function of risk tolerance and the amount of time an investor plans on holding the security. Both of these investors could be right based on their differing investment horizons. The investor with a $75 target may want to be out of the trade within one year, while the $120 price target trader may be willing to hold the trade for 10 years.
Price targets are subject to change and are not static. New information about assets is coming out all the time. Therefore, the price target of an asset may change from time to time.
An asset that an analyst or trader believes is priced too high may have a lower price target than the current price. This means they expect the price of the asset to fall to a lower price target, instead of rising to a higher one.
- A price target is an analyst's or trader's projection of where an asset's price will go.
- A price target can be lower or higher than the current market price of the asset. A higher target price is bullish, while a lower target price is bearish.
- Price targets will vary by the individual since each trader uses different methods to project price targets.
- When prominent analysts change their price targets, it can have a significant impact on the price of the asset.
- Investment horizon is very important when considering price targets. A much larger price target is more reasonably expected over a longer period of time, while a shorter-term price target tends to be more conservative.
- Price targets don't account for risk tolerance. Controlling risk is up to the trader. A stock may reach the price target, but if it collapses by 50% prior to that it may not be ideal for many investors.
A Real World Example of Price Target
Price targets often affect the price of a stock itself. For example, if a stock is trading at $60, but the company has a bad quarter and analysts reduce the price target from $70 to $50, it could generate selling activity and reduce the share price closer to the $50 target. Conversely, if the same company with a $60 share price has a good quarter and analysts increase its price target from $70 to $80, more investors will likely choose in invest, driving up the share price.
As a real example, on February 21, 2019, UK auto parts company Delphi Technologies reported earnings which seemed fairly weak, as revenue fell by 9% and the company indicated it could see a few weaker quarters ahead. That said, adjusted earnings still beat analyst expectations for the quarter. The stock rose 19% to close at $21.74, up from the prior day's close of $18.25.
The following day a prominent analyst firm upgraded the stock, raising the price target from $20 to $30. This may have helped push the price up again, as the stock rose by as much as 10% in early trading before closing the day at $23, 5.8% higher.
It is impossible to assess exactly how much of the rise was attributed to the upgrade since prices rise and fall all the time. Although, upgrades and higher price targets typically push prices higher, while downgrades and dropped price targets typically have a negative effect on the stock price.