The Wall Street stockbroker/sell side analyst mumbles, "Well, um...if the company produces $1.20 in earnings this year, up from a dollar next year...and 20 percent growth is sustainable for the foreseeable future, then the stock should trade at, well, give or take 20 times earnings. And so forward earnings of $1.20 is, uh...a 24 dollar price target, up 6 bucks from $18, so uh...yeah, $24 is my target price." Yeah. That’s a target price.
A given stock is trading at whatever price. There’s some imaginary bowman, like Hawkeye from the Marvel movies aiming his arrow where the apple sits on the other guy’s head.
Why do target prices even exist? Well, in the '70s and '80s, Street analysts basically only gave 3 recommendationss: Buy, sell, and hold. But there needed to be more granularity. Like…sure, Disney was a great company and it always seemed to be a buy, but...at any price? Or just up to some number?
So analysts basically gave their stockbrokers an additional thing to talk to their clients about, i.e. when a stock did hit a given price target, the analyst would then raise it, i.e. raise the target for whatever reason, or would change their rating from, say, buy to hold.
How’s that work? Well, a Wall Street analyst presents to the world her view of the value of the given company, usually something presented in the form and flavor of earnings. Why earnings? Because every investor on Wall Street (whether they grew up covering newspaper print or semiconductors) speaks the language of earnings. That is, earnings apply to any industry as a rational driver of stock price multiples. Yes, sometimes the rationale behind target prices comes from weird valuation metrics, like revenue multiples...and usually there’s a lot of mumbling that, "Uh, well the flying car industry is brand new, with nobody having any profits and spending all their money to buy growth, so the industry trades at an average of 6x revenues, and we think YesFlyNoCrash should trade at a 1x revenue multiple premium to the market, because of, you know, its emphasis on safety…so with $100 million of revenues projected this year, it should trade at 7 times that number, for a valuation of $700 million...but today its market capitalization is only $550 million, so there’s some 25-ish percent upside from here if it hits our target price…"
But yeah. Let’s, uh...hope that’s the only target the flying cars hit.
Related or Semi-related Video
Finance: What is a target price?2 Views
And finance Allah shmoop What is a target price Oh
with Wall Street stock brokers Cell site analyst Mumbles Well
if the company produces a dollar twenty and earnings this
year up from a dollar next year and twenty percent
growth is sustainable for the foreseeable future than the stock
should trade it well give or take twenty times earnings
And so forward earnings of a dollar twenty is twenty
four dollars Price Target up six bucks from eighteen here
So yeah twenty for is my target price So that's
a target price It given stock's trading at whatever price
There's some imaginary Bowman like that boring guy from the
Marvel movies aiming his arrow from here to here where
the you know Apple sits on the other guy's hit
Why do target prices even exist Well in the seventies
and eighties Street analyst basically only gave three recommendations by
cell and old but there needed to be more granularity
like Well sure Disney was a great company and it
always seemed to be ABI but at any price or
just up to some number So Analyst basically gave their
stockbrokers and additional thing to talk to their clients about
I'ii want to stock did hit a given price target
The analyst would then raise it I raise the target
for whatever reason or would change their rating from say
by toe hold So how does that work Well the
Wall Street analyst presents to the world her view of
the value of the given company usually something presented in
the form and flavor of earnings or earnings Multiple Why
earnings Because every investor on Wall Street whether they grew
up covering newspaper print or semi conductors speaks the language
of earnings like Gap earnings official earnings that is earning
supplied Any industry is a rational driver of stock price
multiples And yes sometimes the rationale behind target prices comes
from weird evaluation metrics like revenue multiples And usually there's
a lot of mumbling that gets done behind the scenes
there Like uh well the flying car industry is brand
new with nobody having any profits or earnings and spending
all their money to buy growth So the industry trades
at an average of six times revenues and we think
yes fly No crash should trade at a one times
revenue multiple premium to the market because of you know
its emphasis on safety and not crashing So with one
hundred million of revenues projected this year it should trade
it seven times that number for evaluation of seven hundred
million dollars But today it's market capitalization is only five
hundred fifty million so there's some twenty five ish percent
upside from here if it hits our target price but
let's hope that's the only target the flying cars hit