Bull and Bear scenarios.

Analysts frequently use scenario analysis to help assess how the range of likely forecast assumptions impact their target price. We often refer to these scenarios as Bull and Bear scenarios, with the bull case or upside scenario reflecting more aggressive assumptions, and the bear case or downsides scenario reflecting more conservative assumptions. On this chart we can see that the analyst model has base case revenue forecasts shown by the purple line, which gives a target price of 50 dollars. However, the analyst has also modeled a bull scenario with more aggressive revenue growth and that's shown by the blue line and a bear scenario with more conservative revenue growth and that's shown by the red line. As you would expect the more bullish revenue forecast generate a higher target price and that's $55 and the more bearish revenue forecast generate a lower target price and that's 42 dollars. So why is this scenario analysis helpful? Well firstly it helps the analyst to understand the uncertainties and likely range of outcomes. If there is a widespread between the Bull and Bear scenarios, this suggests that there is a great deal of uncertainty in the analyst target price. This in turn helps the analyst to assess their level of conviction on the recommendation. For example, if all three scenarios are above the current share price as the case here this provides a very high level of conviction for a buy recommendation.