Stock Price Targets Explained

When informing yourself about stocks, you will frequently come across the term price target. The term can be confusing because a price target has little to do with a target in the classic use of the word. This moneyland.ch guide explains what a price target is.

What is a price target?

A price target is a prediction about future developments in a stock’s value. The timeframe for this prediction is not precisely defined. Often, price targets are based on timeframes of between one and 12 months. But the exact timeframe also depends on how the price target is determined (more on this further down).

Price targets should be interpreted in this way: If a stock has a price target of 150 francs, then the expectation is that the stock’s price will reach 150 francs in the future (within 12 months, for example).

Price targets may be published by financial analysts or other financial service providers. Normally, the same analyst will publish multiple price targets for the same stock.

Analysts make recommendations based on price targets. The recommendation may be buy, hold, or sell – depending on the stock and price target.

How are price targets calculated?

Generally, price targets are the result of the ongoing analysis of a stock. The methods for determining price targets can be divided into two very general categories, but a combination of these may also be used.  

• Fundamental analysis: In this method, the intrinsic value of a company serves as the sole or primary basis for creating price targets. The stock is subjected to a fundamental analysis. Factors that are accounted for include developments in revenues and profits, the company’s debt, the interest, market, and economic environments, and the company’s exposure to political developments. Price targets based on fundamental analyses sometimes have timeframes of more than just several months. You can learn more about fundamental analysis in the guide to stock valuation.
• Chart analysis: This method is based only on the stock’s past performance (charts), rather than on a company’s data. Chart analysts try to determine buy and sell trends based on past price developments. Chart analysis is subject to scientific debate.

What is the likelihood of stocks reaching their price targets?

Price targets are simply assumptions and not accurate predictions. Because of that, they should be used with care. The factors that affect price targets can change rapidly when events occur that were not foreseeable when the prediction was made. In principle, a price target is a snapshot that applies at the time of publishing and can easily become obsolete if conditions change.

Example: High-impact factors like the coronavirus pandemic were not accounted for in price targets before they occurred, but had an enormous impact on the entire stock market.

What are the disadvantages of price targets?

Price targets can be confusing and misleading for investors. You should be aware of these disadvantages and risks:

• Subjective opinions: While price targets may be based on facts that can be independently verified, the weighting of factors and the estimates are determined by the analysts. You should understand that price targets are always subjective assumptions. Financial experts are not able to accurately predict future stock market developments in advance. The differences in assumptions are made apparent by the fact that price targets for the same stock can be very different depending on which analyst publishes them.
• Changing conditions: The conditions affecting stocks change on an ongoing basis. Even price targets that are only a few days old can be obsolete if new events have occurred in the meantime. Less experienced investors may have a difficult time recognizing these changes.
• Intransparent timeframes: Often, the timeframe for which a prediction applies is not published along with the price target. That can make understanding the price target more difficult.

How important are price targets for investors?

The value of price targets for you as an investor depends on your investment horizon.

If you want to invest your money over a long term, then price targets are less important for you. They are usually based on timeframes of just several months. But if you want to invest over many years, or even decades, then short-term price targets are not worth bothering with. That is even more true if you invest in entire indexes (using ETFs, for example), and not individual stocks.

Price targets can be interesting for you if you actively buy and sell stocks with the aim of earning returns over the short-to-mid-term. But here to, it is important to only use price targets for orientation, and do not look at them as accurate predictions. Always pay careful attention to the date on which a price target was published, and to the method and data used.

Choosing stocks based only on price targets is not a good idea. Price targets should not be used as an alternative to researching the companies you want to invest in. You can learn what to consider in the guide to choosing the right stocks.

More on this topic:
How to invest money in Switzerland
How to choose the right stocks
How to choose the right ETFs
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