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When analysts define a new price target for a stock. Is it based on actual fundamentals: costs, earnings, etc. Or does it include a guesstimation of how much the stock will change based on emotions from the masses?

For example, analysts keep saying Amazon is overvalued, yet the stock price consensus, pushed forward by analysts, is currently at $2100, which is above the current price. So it's undervalued? Or do they just assume people will be willing to shell out the same amount of goodwill on top of the actual fair price they calculated?

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A price target is a projection based on current information.

A stock analyst analyzes company financials as well as expectations of change (new product, recent acquisition, etc.) and utilizes an earnings forecast model to determine price targets for the various time periods (the next quarter, the next year or two). This assumes that current current will be maintained and also assesses current economic force.

Analysts and financial institutions use different valuation models and that leads to a variety projections. As a result, you'll also see a Consensus Estimate which is the combined estimate of all of the analysts covering a company.

  • In other words - a guesstimate! – Victor Jul 31 '18 at 20:12
  • I'd call it an educated guesstimate because much of the upcoming financial info is somewhat known (current orders, inventory, receivables, expected operational cash outflows, expenses, discontinued operations, change in tax law, etc., etc.) – Bob Baerker Jul 31 '18 at 21:40
  • So it's based on what the analyst considers a "fair value", given a certain time frame? – Gilles Lesire Aug 1 '18 at 12:23
  • Analysts project forward earnings based on current information. If earnings increase, the P/E ratio will decrease and many investors use that to judge which companies are more attractive in the group. So in that sense, yes, "fair value". – Bob Baerker Aug 1 '18 at 12:37

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