The Pros and Cons of Price Targets
@sina was asking some insightful questions about price targets, and I wanted to take a stab at answering them. Here's some questions:

Why are price targets useful?
Ostensibly the value of a price target is to analyze when the value of an opportunity has been fully realized. This helps you know when to sell a stock and move on to new opportunities.

Why can price targets hurt you?
Let's say you've found a company lead by world-class management (let's use Elon Musk as an example). The management is extremely competent and has the ability to execute in markets where success opens up even bigger opportunities to go after.

If your long term growth rate exceeds your cost of capital, your present value is infinite. But a price target can't take into account future unknown opportunities. It's better to just stay invested in the company because it's impossible to put an exact price on it.

Setting a price target for this rare company would be counter-productive, because the value of the opportunity is never fully realized. You want to keep backing sustainable growth forever, if possible. Price targets will only encourage you to jump off the ride too soon.

The best thing that can happen in investing is asymmetric upside. One of the most damaging things you can do to yourself is to cut the biggest returns off too short.

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It's important to note that these kinds of companies are truly rare. When the market is exuberant, valuations imply that these companies are ubiquitous, which is not the case.

But that's a fun follow-up question: What are some companies / management teams you think are capable of perpetually growing their businesses?

I'd probably put Jeff Bezos and Elon Musk on the list. Steve Jobs too if he was still around.
Micheas's avatar
Thanks for sharing! First thoughts are $META $DIS and even $WMT the strategic direction this past year has been amazing.
Nathan Worden's avatar
Would agree that Zukerberg's acquisitions of Instagram, WhatsApp, and Oculus have shown he has the ability to keep looking ahead.

Disney is similar- buying out Pixar, Lucusfilm, and Marvel has made it what it is today. And the foresight of building out Disney+ has been huge too.

Walmart being able to build out it's online shopping experience, grocery, and now financial services- makes me think you aren't wrong.
Gaurav Mishra's avatar
I have been debating with Myself on $WMT as well! Only problem is that it's a mammoth. With 524 Billion USD revenue and 417.8 B Market cap it's really undervalued (unless I am reading numbers incorrect).

Whatever they're doing; will it make enough dent in their topline? I doubt. If the investors are not excited at 524 Billion revenue; what revenue uptick would excite the investors?

Also, taking on initiatives is one thing; giving everything to that initiative is another. I am also not confident that Walmart has that in the DNA.

But, then these initiatives are super strategic.
Nathan Worden's avatar
Thats a good point about taking on initiatives vs. succeeding at those initiatives. Walmart has become the company it is today because of past (extremely good) execution in scaling domestically in retail and (frankly) squeezing their suppliers.

While you could view this as a good management track record, you could also argue that it doesn't count when the new initiative is in such a different area (e.g. fintech and financial products). Expertise in one area does not transfer over to expertise in all areas.

Good point about 524 Billion in revenue vs. 417 Billion Market cap. Looks to me like the market doesn't think WalMart will be able to grow earnings fast despite the new initiatives.
Arjun Banerjee's avatar
$SQ is surprisingly well-rounded and creating an ecosystem
Nathan Worden's avatar
I’d agree- and while Jack is quite responsible for that, I think I might look at some of the managers around him to give most of the credit to. From what I hear, the management team is quite strong at Square even without Dorsey.

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