What is a target price?
The value an investor or analyst anticipates a stock will reach within a defined time period. In the context of a takeover, it's the price at which the acquirer wants to buy the target firm and earn maximum reward.
Where have you heard about target prices?
They're used by investment analysts as a projection tool and have the ability to affect the price of a stock itself. If a company releases its quarterly results and beats expectations, then analysts may increase its target price, driving up the share price.
What you need to know about target prices...
The reliability of target prices can fluctuate dramatically. In the worst examples, they amount to little more than untrustworthy marketing tools with no evidence of a viable foundation.
A good target price offers a realistic estimate of a stock's future price, and is reached by undertaking a detailed earnings projection - based on the earnings per share (EPS) forecast - and by factoring in assumed valuation multiples.
The term can also be used to describe the price of the underlying security at which an option will become in the money.