Target Price

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.