Almost every stock page shows an "average analyst price target", usually well above the current price. It looks like a forecast. It's better read as a mood indicator with a known optimistic lean. Here's why, and what to look at instead.
What a price target is
A price target is an analyst's estimate of where a stock should trade, usually 12 months from now, based on their model of the company's earnings, cash flow and a valuation multiple. It comes with a rating, typically some version of Buy, Hold or Sell (also called Outperform, Neutral, Underperform, or Overweight, Equal-weight, Underweight).
The "consensus" or "average" target is simply the average of the targets from the analysts who cover the stock. How many analysts that is matters a lot: an average of 30 targets is a different thing from an average of 2.
Why targets tend to run high
The average target is above the current price for most stocks, most of the time. A few reasons, all well documented:
- Ratings skew positive. Buy ratings far outnumber Sell ratings across Wall Street. Analysts who are too negative can lose access to company management, and their employers often have other business with the companies they cover.
- Targets follow the price. Analysts frequently raise targets after a stock has risen and cut them after it has fallen, so targets often chase the price rather than lead it.
- Optimism in earnings forecasts. Long-range earnings estimates tend to start high and get revised down as the year goes on.
- Survivorship. Analysts tend to stop covering, or quietly drop, companies that go badly, so the stocks that still have coverage lean towards ones analysts like.
None of this means analysts are useless. It means the level of the average target is biased upward, so "the average target is 20% above today's price" is a weaker statement than it sounds.
What tells you more than the target
- Changes, not levels. An upgrade or downgrade, or a cluster of target raises or cuts after results, is news. A target that has sat at the same level for months isn't.
- Revisions to earnings estimates. When analysts raise or cut their forecasts for next quarter's or next year's earnings, that tends to say more than the target does. (This is what Ticker Council's separate Earnings Estimates seat watches.)
- The spread. If the lowest target is half the highest, analysts genuinely disagree, and the average hides that.
- How many analysts. Two targets aren't a consensus.
- The rare Sell. Because Sell ratings are uncommon, a new one from a respected analyst tends to get attention.
How to read an analyst summary in 30 seconds
- How many analysts cover it?
- What's the spread from the lowest target to the highest?
- Have targets and ratings moved recently, and in which direction?
- Are earnings estimates being revised up or down?
- Then, and only then, glance at the average target, remembering it leans high.
How Ticker Council uses analyst data
The Analyst Targets seat on Ticker Council reads price targets and rating changes for the stock you run, and weighs recent changes more than the level. On every run, the 1-year call also shows Wall Street's average 12-month target and how many analysts it comes from, next to the Council's own price range. Because analysts' targets tend to run high, the Council's range can sit well below theirs. Seeing both side by side shows where it agrees with Wall Street and where it doesn't.
Questions
How accurate are analyst price targets?
Not very, on average. Targets are typically set 12 months ahead, the average target sits above the current price for most stocks, and targets tend to follow the price after it moves. Changes in ratings and earnings estimates usually tell you more.
Why are analyst price targets usually higher than the current price?
Because ratings skew positive (Buy ratings far outnumber Sell ratings), analysts have business incentives to stay on good terms with the companies they cover, and coverage tends to drift towards companies analysts like.
What does a consensus price target mean?
It's the average of the price targets from the analysts who cover a stock, usually for 12 months ahead. Always check how many analysts are behind it and how far apart their targets are.
Should I buy a stock because its price target is higher than its price?
Not on that alone. The average target is above the price for most stocks most of the time, so it isn't much of a signal by itself. This isn't financial advice.