Price Targets Mean Nothing

Investors are keenly aware that news can drive stock prices. When the news is good, stocks typically react positively by increasing in price. When the news is not so good -- OK, just plain bad -- stock prices can suffer. But what happens when the news is not really news? Read on for a case in point.

Shares of Synaptics (Nasdaq: SYNA  ) plunged 16% on Monday when an analyst from Bear Stearns cut his price target on the stock from $53 to $49. The analyst raised concerns that Apple Computer (Nasdaq: AAPL  ) won't be using the company's TrackPad technology in the newly revamped line of PowerBook notebook computers.

My first reaction was, "Is this really news?" The short answer is no. Here's why.

Last month Synpatics reported terrific numbers. At that time the Bear Stearns analyst raised his rating on the stock to "outperform." The same analyst also increased earnings and revenue numbers for the next two years on the grounds that the company benefited from stronger-than-expected iPod sales. Looking at the estimates for fiscal 2006, the growth in earningsis forecast to be about 23%. At $35 a share, Synaptics trades at a forward price-to-earnings ratio of 25, not expensive relative to other tech stocks. At $53 the price-to-earnings ratio rises to 38, still not exceedingly expensive.

During that same conference call, Synaptics' CEO stated revenues for the next quarter would be flat, as increased sales of digital music players are expected to counteract a typical decline in the notebook PC market during the period. Even if Synaptics technology is not used in the PowerBook line, the loss represents just 2% of the company's total notebook revenue. Portable music players, both from Apple and Creative Technology (Nasdaq: CREAF  ) , account for much more of the revenue pie. Plus the focus for future sales of the TouchPad technology will be in the mobile phone markets, with handset manufacturers such as Nokia (NYSE: NOK  ) and Ericsson (Nasdaq: ERICY  ) .

This brings me to my point. Should Foolish investors pay any attention to changes in so-called price targets promoted by analysts? Other than causing wild swings in the market, they change nothing about the fundamentals of the company and don't reflect the true value of the stock. Foolish investors shouldn't panic because of the price decline, and pay little -- if any -- attention to price targets. The stock is even more attractive now than before. That is the real news worth reading.

For more of my Foolishness check out Synaptics Has the Right Touch.

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Fool contributorKelvin Taylor does not own shares of any of the companies mentioned.


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