When researching a stock, you will likely come across a published target price for the stock. It is important to understand where this target price comes from and who issues the stock's target price.
One of the benefits that Wall Street brokerages offer to their clients is research on individual stocks. The brokerages have large teams of analysts whose main responsibility is to research companies and their stocks. The analysts dig deep into a company's business, finances, growth rates, competition and business practices.
Along with many other metrics, the analysts issue target price estimates for the stocks that they cover. The target price is typically an estimate for the price of the stock one to two years in the future. As time goes by and factors change, the analyst will update the target price estimate as warranted.
Typically, only clients of the analyst's firm have access to the target price estimates. Furthermore, each Wall Street analyst can, and will, come up with a different target price based on their opinions on the company's prospects. These varied opinions can lead to confusion when looking at target price data from multiple brokerages.
Luckily, there are several firms that help consolidate all these target price estimates. These data aggregators compile the target price estimates from all the Wall Street brokerages and calculate an average. This average is the consensus target price. Firms like Factset, Bloomberg and Zacks Investment Research act as aggregators for target price estimates, along with other types of data issued by the analysts.
Let's look at a hypothetical example. Assume there are five Wall Street analysts who issue target price estimates for the stock of Disney. Each analyst will issue their own target price. Let's assume that the five target price estimates are currently $200, $190, $210, $205 and $225. The data aggregators will average all five of these estimates to arrive at the consensus target price estimate.
In this example, the consensus target price estimate is $206. The data aggregators will provide this consensus estimate as well as the range of price target estimates. The range is the highest and lowest individual price target estimates. In our example, the target price range for Disney is $190 to $225.
The data aggregators cannot disclose individual target price estimates, but they can disclose the consensus target price as well as the range. The data aggregators sell these consensus estimates to financial websites, where individual investors can access them. Also, many brokerage firms provide aggregated consensus data to their clients.
It is important to remember that target price estimates are the opinions of Wall Street analysts. These analysts are not infallible and their estimates, while backed by real research, are their opinions and the estimates are not guarantees. Target price estimates are a great starting point in an investor's due diligence, but they should consider completing their own research before investing in a stock.