ADR sponsored by Tencent Music Entertainment Group (TME) closed the last trading session at $5.06, gaining 20.2% over the past four weeks, but there could be plenty of upside potential in the action if price targets at short term set by Wall Street analysts are a guide. The average price target of $6.55 indicates an upside potential of 29.5%.
The average estimate includes eight short-term price targets with a standard deviation of $2.05. While the lower estimate of $3.90 points to a 22.9% decline from the current price level, the more optimistic analyst expects the stock to jump 97.6% to reach $10. It is very important to note the standard deviation here, as it helps to understand the variability of the estimates. The smaller the standard deviation, the greater the agreement between analysts.
Although the consensus price target is a highly coveted metric among investors, it may not be wise at all to rely solely on this metric when making an investment decision. Indeed, the ability and impartiality of analysts to set price targets has long been questionable.
However, an impressive consensus price target is not the only factor that indicates a potential rise in the TME. This view is reinforced by analysts’ agreement that the company will report better earnings than they had previously estimated. While a positive trend in earnings estimate revisions doesn’t give any indication of the magnitude of the stock’s potential upside, it has proven effective in predicting an upside.
Price, Consensus and EPS Surprise
Here’s what you might not know about analyst price targets
According to researchers from several universities around the world, a price target is one of many pieces of information about a stock that misleads investors far more often than it guides them. In fact, empirical research shows that the price targets set by many analysts, regardless of the degree of agreement, rarely indicate where a stock’s price might actually be headed.
While Wall Street analysts have a deep understanding of a company’s fundamentals and how sensitive its business is to economic and industry issues, many of them tend to set price targets that are overly optimistic. You wonder why ?
They typically do this to generate interest in the stocks of companies with which their companies have existing business relationships or with which they are seeking to associate. In other words, trading incentives from companies covering a stock often result in inflated price targets set by analysts.
However, a tight grouping of price targets, which is represented by a low standard deviation, indicates that analysts have a high degree of agreement on the direction and magnitude of a stock’s price movement. Although this does not necessarily mean that the stock will reach the average price target, it could be a good starting point for further research aimed at identifying potential fundamental driving forces.
That said, while investors shouldn’t ignore price targets entirely, making an investment decision based solely on them could result in a disappointing return on investment. Thus, price targets should always be treated with a high degree of skepticism.
Here’s why there could be a lot of benefits left in TME
There has been growing optimism among analysts lately about the company’s earnings outlook, as indicated by the strong agreement among them to revise EPS estimates upwards. And that could be a legitimate reason to expect the stock to rise. After all, empirical research shows a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
Over the past 30 days, the Zacks consensus estimate for the current year has risen 25%, with two estimates rising relative to no negative revision.
Additionally, TME currently has a Zacks #2 (buy) rating, meaning it is in the top 20% of more than 4,000 stocks that we rank based on four factors related to earnings estimates. Given an impressive externally audited track record, this is a more conclusive indication of the stock’s upside potential in the near term. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, while the consensus price target may not be a reliable indicator of what TME might gain, the direction of price movement it implies seems to be a good guide.
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