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Analysts split on need for Net target prices

Although target prices are still largely used by analysts to give investors more numbers to crunch, several Internet analysts in the last two years have been pulling away from the practice.

Earlier this week, Yahoo soundly beat analysts' third-quarter estimates and saw its share price rise 14.5 points to close at 190.25.

But some analysts predict the stock could rise as high as $300 a share in the next 12 months. Donaldson Lufkin & Jenrette has a 12-month target price of $300 a share, and analysts from other brokerages yesterday raised their target prices: Deutsche Banc Alex Brown increased its target price to $250 from $220, and PaineWebber moved its target price to $195 from $155.

Although target prices are still largely used by Internet analysts to give investors more numbers to crunch in determining whether to add or divest a stock, several analysts in the last two years have been pulling away from the practice.

"Up to two years ago, everyone used target prices, but now some have dropped off," said Andrea Williams, an E*Offering analyst, who has discontinued the practice.

Target prices, which serve as another means to value a company, are based on earnings and growth projections. Given that few Internet companies are profitable, analysts often need to project earnings two, three, or five years into the future when determining a target price.

"No one can come up with a good way to value these companies today; therefore, the stocks get yanked around with sentiment and news flow," Williams said.

One of the most notable cases involved Amazon.com. Last December, analyst Henry Blodget, formerly with CIBC Oppenheimer, issued a $400 price target when the online bookseller was trading around $240. Within weeks, the stock blasted through Blodget's target. For Blodget, his 12-month target was reached at warp speed.

Scott Ehrens, an Internet analyst with Bear Stearns, said he stopped issuing price targets last spring because it wasn't practical. He said companies may hit his target early in the game, prompting some investors to capture gains and dump the stock even though the company still has a bright outlook.

Although some analysts have discontinued the practice, many still issue targets.

"Target prices should reflect what analysts believe is the underlying value of a company," said John Segrich, an analyst with CIBC World Markets. "For an analyst not to do that is a cop-out. This is what the street relies on analysts to do."

He added that even though Internet stocks have been a volatile sector, analysts should continue issuing targets.

But one Wall Street researcher noted that with the volatility of Internet stocks and the need to change the price targets so often, the practice becomes reactive instead of proactive and gives investors a false sense of reality.