Investors and traders love price targets. All you need to do is buy a stock with a significant price target, then sit and wait for it to hit. It makes the whole investment process very easy.
Like most things in life - and in the stock market - it isn't that simple. Price targets are a manifestation of hopes and wishes. Although great effort goes into calculating them, they are seldom very accurate.
For many people, price targets are an excuse to avoid making any further decisions. They allow traders to be lazy. Simply set the target and then wait to reap gains when the stock ultimately hits your number. Why even bother to watch a stock if you have confidence that your price target will eventually be attained? It is a simple way to make money -- if the targets actually work.
The main problem with price targets is that they are a static number in a dynamic situation. They fail to take into account that conditions are constantly changing. A price target set today might make sense, but if a pandemic hits, interest rates rise, or the economy shifts, then it will look downright foolish tomorrow.
There are two basic types of price targets. There are fundamental targets set by analysis, and there are price targets set by technical traders that extrapolate from past price action.
Analysts that focus on fundamentals tend to use complex spreadsheets with discounted cash flow calculations. These spreadsheets are extremely detailed and look very precise. You just enter the numbers, and a price target is generated. However, assumptions like the appropriate discount rate and the levels of revenues far into the future are just guesses. It is very easy to substantially change a price target by making minor changes to a few assumptions.
If analysts were good at setting price targets, that would suggest that they would effectively predict market tops. When the market is extremely extended, then most every stock would be trading above its 'target' price, and it would be clear that stocks need to correct. The reality is just the opposite. As a stock rises in price, analysts keep finding ways to increase targets. They can be very creative at finding ways to give a stock like Tesla (TSLA) higher and higher targets even when there is no real change in fundamentals. Back in the internet bubble days, some of the target prices were justified using metrics like pageviews and other things that had questionable predictive value.
Analysts will change targets due solely to price action, which undermines the very basis for setting a target in the first place.
Price targets set by technical traders aren't much better. One of the favorite approaches is the 'measured move.' This is just extrapolation using past action. It is based on the idea that a stock that moved X amount off a base in the past is likely to see another move of the same proportion in the future. It appeals to a sense of order and logic, but there is no reason that stock should move in this fashion and, in the vast majority of cases, they never act in the way predicted. Sometimes traders make targets a self-fulling prophecy in the short term, but generally, it is just wishful thinking.
Price targets can be quite useful in trading because they do create short term movement. It can be very lucrative trading analyst price targets, so it is important to consider them. Price targets do influence psychology even when their calculation is questionable at best. A sudden large increase in a price target will lead market players to believe that there has been a significant change in a company's business, and that can help create some sustained momentum that makes for good trading. Sometimes that is true, and the price target increase will be the start of a major run.
Price targets are rarely accurate, but they are accepted by the market as having some value, and they do exert an influence at times. They can help create some good trading opportunities but don't take them too seriously. They are just a function of hopes and dreams and will shift on a daily basis.
