You recently learned how to value stocks using the P/E multiples approach, const

Question

You recently learned how to value stocks using the P/E multiples approach, constant dividend growth model, and corporate valuation model. On September 24, 2015, you tuned into CNBC financial TV channel and watch different security analysts discussing the current valuations of Amazon, Apple, Google, Facebook, Goldman Sachs, and the overall U.S., European, emerging stock markets . However, you are puzzled because these analysts could not agree on the current valuations and end-of-year price targets for the four companies and overall stock market. For example, two analysts argued that Apple and Goldman Sachs (an investment bank) are currently overvalued, while others reached the opposite conclusion. Their end-of-the-year stock price targets also varied widely. Please solve this puzzle and explain how these analysts can reach such very different conclusions on stock valuations and price targets. You can assume that all analysts are using the same three stock valuation approaches. Limit your answers to no more than 10 sentences.

Explanation / Answer

Since, the analysts are valuing these stocks, the valuer's individual bias creeps into the valuation. Every analyst has his/her expectations for a stock and he estimates the Price to Earnings multiple based on this bias. While use the multiples approach, the analysts often tend to hover around the industry mean or median but a business may not necessarily trade near those values.
Moreover, if the constant dividend growth model and corporate valuation model are used, the values depend on the earnings the company is expected to generate and the dividends it will pay out. With a slight variation in the terminal growth rates, the valuation differences are often significant, thus leading to different price targets.

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